Commerce Bancshares, Inc. — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with fiscal 2020. Commerce Bancshares is a Missouri-based bank holding company operating through Commerce Bank and other subsidiaries. Its businesses include commercial and consumer banking, payments, mortgage banking, trust, brokerage, and wealth management.
Financial performance and condition
| Metric | 2021 | 2020 / change |
|---|---|---|
| Total assets at year-end | $36.7 billion | $32.9 billion |
| Loans at year-end | $15.2 billion | $16.3 billion; down 7.1% |
| Deposits at year-end | $29.8 billion | $26.9 billion; up 10.6% |
| Net interest income | $835.4 million | $829.8 million; up 0.7% |
| Non-interest income | $560.4 million | $505.9 million; up 10.8% |
| Net income attributable to Commerce Bancshares | $530.8 million | $354.1 million; up 49.9% |
| Diluted earnings per share | $4.31 | $2.77 |
| Net yield on interest-earning assets, tax-equivalent | 2.58% | 2.99% |
| Net loan charge-offs / average loans | $18.6 million / 0.12% | $34.9 million / 0.22% |
| Cash, cash equivalents and restricted cash, year-end | $4.30 billion | $2.21 billion |
Net income growth chiefly reflected a $203.5 million year-over-year reduction in the provision for credit losses: the 2021 provision was a recovery of $66.3 million, versus expense of $137.2 million in 2020. The recovery reflected improved economic forecasts and lower-than-anticipated credit losses after the pandemic downturn. The allowance for credit losses on loans fell to $150.0 million, or 0.99% of loans, from $220.8 million, or 1.35%.
Non-interest income growth was led by trust fees, up 17.2% to $188.2 million, and bank-card transaction fees, up 10.6% to $167.9 million. Net investment securities gains were $30.1 million, including $31.7 million of fair-value gains on private-equity investments, partly offset by bond-sale losses. Non-interest expense rose 4.9% to $805.9 million; the efficiency ratio increased to 57.6% from 57.2%.
Average return on assets was 1.55% (1.20% in 2020), and return on average common equity was 15.37% (10.64%). The year-end tangible common equity-to-tangible assets ratio was 9.01%, down from 9.92%. Consolidated total risk-based capital was 15.12%, and the leverage ratio was 9.13%; the Bank exceeded well-capitalized regulatory thresholds.
Operating cash flow was $597.7 million. Financing activities provided $3.57 billion, mainly from deposit growth and short-term borrowings; investing activities used $2.08 billion, including net investment-security purchases. Year-end deposits funded most of the balance sheet; the average loans-to-deposits ratio was 56.5%. Liquid assets reported by the Company totaled approximately $20.0 billion, and available FHLB and Federal Reserve borrowing capacity was $2.6 billion. Year-end borrowings included $3.0 billion of repurchase agreements and $43.4 million of federal funds purchased. No FHLB advances were outstanding.
Material changes and fourth-quarter context
- Total loans declined $1.2 billion, largely because PPP loans ran off as borrowers received forgiveness. Excluding PPP loans, business loans grew 4.1% year over year. Deposits increased $2.9 billion.
- Average loan interest income fell $42.3 million, largely due to lower rates and balances in selected portfolios. Reduced deposit and borrowing costs and higher average investment-security balances partly offset that decline; the net yield on interest-earning assets fell 41 basis points.
- Non-performing assets declined to $9.3 million, or 0.06% of loans, from $26.6 million, or 0.16%. Potential problem loans decreased 23.0% to $278.7 million.
- Available-for-sale securities had a $30.9 million net unrealized gain at year-end, compared with $351.7 million a year earlier. The 2021 decline contributed to a $254.3 million net other comprehensive loss.
- Fourth-quarter 2021 net income attributable to the Company was $114.9 million, versus $129.9 million in fourth-quarter 2020. The 2021 quarter included a $9.7 million net securities loss, following gains in the prior three quarters.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings or revenue guidance and makes no prediction about future interest rates, deposit levels, loan demand, or their effect on results. Management describes core revenue growth, relationship expansion, controlled geographic expansion, technology, and customer satisfaction as strategic priorities.
- In February 2022, the Board authorized a 6% increase in the regular cash dividend. The Company reported 53 consecutive years of regular common-dividend increases through 2021 and a 28th consecutive annual 5% stock dividend. Future dividends remain subject to Board discretion, earnings, capital needs, and financial condition.
- Reported 2021 results included an $8.2 million non-recurring litigation settlement cost and substantial private-equity fair-value gains. These items, along with the large credit-loss reserve release, affected year-over-year earnings comparability.
- Principal risks include COVID-19 and regional economic conditions; interest-rate and liquidity changes; credit-loss estimation uncertainty; competition; cybersecurity and third-party vendor disruptions; and valuation risk in securities and other assets. The Company also identifies exposure to climate-related changes in regulation, customer behavior, and collateral values.
- LIBOR transition remained a risk: contracts extending beyond the relevant cessation dates included approximately $1.9 billion of commercial loans, $1.4 billion of derivative notional, and $840 million of investment securities. The Company stopped entering new USD LIBOR-referenced loan contracts in December 2021 and expected system changes to be completed in 2022; transition valuation and customer-dispute effects remained uncertain.
- The Bank completed conversion of its core customer and deposit systems in the first quarter of 2022; the initial conversion was reported successful, but the filing warns of possible follow-on operational disruption.
- Off-balance-sheet commitments included $13.3 billion to extend credit and $418.3 million of standby letters of credit. Many commitments may expire undrawn. The Company also had $186.0 million of state tax-credit purchase commitments expected to be funded in 2022 and a $106.7 million office-development agreement, with $55.2 million paid by year-end 2021.
- The independent auditor issued unqualified opinions on the financial statements and internal control. The allowance for credit losses on collectively evaluated loans was identified as a critical audit matter because it involves significant assumptions and estimation uncertainty.
Important facts for investors to verify
- How much of the 2021 earnings increase is sustainable after excluding the reserve release, private-equity fair-value gains, and litigation settlement cost.
- Whether loan growth excluding PPP, credit quality, and the $150.0 million loan allowance remain consistent with future economic conditions and realized losses.
- How deposit behavior and funding costs respond to changing interest rates, given the large deposit base, $3.0 billion of repurchase agreements, and the filing’s modeled deposit-attrition scenarios.
- The effect of market-rate movements on securities values, accumulated other comprehensive income, and net interest income; confirm the timing and impact of LIBOR contract remediation.
- Whether the 2022 core-system conversion remains stable, and whether contractual commitments, litigation matters, or other contingencies change materially.
- Confirm subsequent-period results, dividend decisions, and capital ratios; this filing does not provide formal earnings guidance.