Commerce Bancshares, Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020—not a standalone fourth quarter. Commerce Bancshares is a Missouri-based bank holding company operating through Commerce Bank and other subsidiaries. Its Commercial, Consumer and Wealth segments provide banking, payments, mortgage, trust and investment services, primarily in the lower Midwest. The company reported $32.9 billion in assets, $16.4 billion in loans and $26.9 billion in deposits at year-end.
Key financial metrics
| Metric | FY2020 | FY2019 / comparison |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $1.336 billion | $1.346 billion; down 0.8% |
| Net interest income | $829.8 million | $821.3 million; up 1.0% |
| Net income attributable to Commerce Bancshares | $354.1 million | $421.2 million; down 15.9% |
| Net income available to common shareholders | $342.1 million | $412.2 million; down 17.0% |
| Diluted earnings per common share | $2.91 | $3.41 |
| Return on average assets / common equity | 1.20% / 10.64% | 1.67% / 14.06% |
| Net yield on interest-earning assets (tax-equivalent) | 2.99% | 3.48% |
| Provision for credit losses | $137.2 million | $50.4 million |
| Net loan charge-offs | $34.9 million; 0.22% of average loans | $49.7 million; 0.35% |
| Non-interest expense / efficiency ratio | $768.4 million / 57.2% | $767.4 million / 56.9% |
| Operating cash flow | $624.0 million | $512.8 million |
Balance sheet and liquidity. Year-end loans grew 10.8% to $16.3 billion; deposits rose 31.3% to $26.9 billion. The loan-to-deposit ratio was 67.7%. Cash, cash equivalents and restricted cash increased $1.3 billion to $2.2 billion. Investing activities used $5.4 billion, principally for securities purchases and loan growth; financing activities provided $6.1 billion, largely from deposit growth. Available-for-sale securities were $12.4 billion at fair value. Borrowings totaled $2.1 billion, mainly repurchase agreements; the company reported no outstanding FHLB advances at year-end and no material long-term debt.
Capital. At year-end, consolidated common Tier 1 and total risk-based capital ratios were 13.71% and 14.82%, respectively; the Tier 1 leverage ratio was 9.45%. The Bank remained above regulatory well-capitalized thresholds. Tangible common equity to tangible assets was 9.92%, down from 10.99%.
Material changes versus FY2019
- Net income fell primarily because the credit-loss provision rose $86.8 million amid pandemic-related economic uncertainty, while non-interest income declined $18.8 million. Lower taxes, higher net interest income and increased securities gains partly offset the decline.
- Net interest income increased as deposit and borrowing costs fell, but the net yield on earning assets compressed 49 basis points to 2.99% as asset yields declined.
- Non-interest income decreased 3.6%. Bank-card fees fell 9.6%, mainly on lower corporate-card transaction volume; mortgage banking revenue increased to $20.7 million from $10.8 million, supporting loan fees and sales.
- Loans grew $1.6 billion, including $1.5 billion of PPP lending. Deposits grew $6.4 billion, including a substantial increase in non-interest-bearing balances.
- Non-performing assets increased to $26.6 million from $10.6 million, or 0.16% of loans. Potential problem loans increased to $361.8 million from $164.8 million.
Outlook, management commentary, risks and unusual items
- COVID-19 and credit quality: Management described the economic outlook as uncertain and said credit-loss estimates rely on forecasts subject to change. The allowance for credit losses on loans reached $220.8 million, or 1.35% of loans, and the liability for unfunded commitments was $38.3 million. PPP loans were government-guaranteed; the company expected most balances to be forgiven in 2021.
- Other credit exposures: Pandemic-sensitive industry loans totaled $2.63 billion, excluding PPP loans. Energy loans were $178.7 million, with 17.7% rated substandard. Active payment deferrals totaled $83.7 million at year-end. Relief programs may have delayed the appearance of deterioration in delinquency and charge-off measures.
- Accounting and estimates: The company adopted CECL on January 1, 2020, recording a $3.8 million net increase to retained earnings. Its allowance depends on management judgments, economic forecasts, prepayment assumptions and qualitative adjustments. The auditor identified the collective allowance assessment as a critical audit matter; the financial statements received an unqualified opinion.
- Interest rates and LIBOR: Low rates pressured loan and securities yields; management’s simulations showed positive modeled net-interest-income effects in rising-rate scenarios, subject to deposit attrition assumptions. The company disclosed $2.4 billion of commercial loans, $1.4 billion of derivative notional and $783.6 million of securities with maturities beyond 2021 that had LIBOR-related exposure. Transition impacts and contract disputes remained uncertain.
- Operations and commitments: The company planned a core customer and deposit systems conversion during 2021, which could disrupt service. It also signed a $106.6 million agreement to develop an office building in Clayton, Missouri. Loan commitments totaled $13.0 billion and standby letters of credit $357.1 million; these are contingent exposures, not necessarily expected cash outflows.
- Unusual items: FY2020 included $21.1 million of realized gains on available-for-sale bond sales, offset in part by $10.1 million of private-equity fair-value losses. The $11.5 million gain on the corporate trust business sale occurred in FY2019, not FY2020. The company monetized interest-rate floors during 2020, receiving $156.7 million in cash-flow-statement proceeds; related gains remaining in accumulated other comprehensive income are to be recognized over time.
- Shareholder returns: The company redeemed its $150 million Series B preferred stock in September 2020 and paid $1.03 per common share in cash dividends during 2020. In February 2021, the Board approved a 2.1% increase in the common cash dividend. No specific earnings or revenue guidance was provided in the filing.
Important facts for investors to verify
- How the CECL allowance and unfunded-commitment liability respond to subsequent economic conditions, and whether rising potential problem loans lead to higher delinquencies, non-accruals or charge-offs.
- The quality and repayment or forgiveness status of PPP lending, and credit trends in pandemic-sensitive, commercial real estate and energy exposures.
- Whether deposit growth persists and how deposit costs, balances and net interest margin respond as interest rates change.
- Progress, cost and customer impact of the planned 2021 core systems conversion, and execution of the Clayton office development agreement.
- LIBOR contract remediation and the eventual effect of benchmark-rate transition on loans, derivatives and securities.
- Capital, liquidity and dividend capacity under stress, including the sensitivity of the parent company to dividends from its Bank subsidiary.