Commerce Bancshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. Commerce Bancshares is a Missouri-based bank holding company serving primarily the lower Midwest, with retail and commercial banking, card, trust, wealth-management, mortgage, leasing, and other financial services. At year-end, it reported $26.1 billion in assets, $14.7 billion in loans, $20.5 billion in deposits, and $3.1 billion in equity.
Financial and operating performance
| Metric | 2019 | Comparison / detail |
|---|---|---|
| Net interest income | $821.3 million | Down 0.3% from 2018; tax-equivalent net interest income was $835.4 million, down $4.6 million. |
| Non-interest income | $524.7 million | Up 4.7%; total revenue, defined as net interest income plus non-interest income, was approximately $1.346 billion, up 1.6%. |
| Investment securities gains, net | $3.6 million | Compared with a $0.5 million net loss in 2018. |
| Provision for loan losses | $50.4 million | Up 18.1% from 2018; net charge-offs were $49.7 million. |
| Non-interest expense | $767.4 million | Up 4.0%; salaries and benefits rose $24.7 million and data processing/software expense rose $6.9 million. |
| Net income attributable to Commerce Bancshares | $421.2 million | Down 2.8%; diluted EPS was $3.58 versus $3.60. |
| Returns and efficiency | ROA 1.67%; return on average common equity 14.06%; efficiency ratio 56.87% | 2018: 1.76%, 16.16%, and 55.58%, respectively. |
| Loans and deposits | Loans: $14.7 billion; deposits: $20.5 billion | Loans grew 4.2%; deposits grew 1.0% year over year. |
| Asset quality | Non-performing assets: $10.6 million; allowance: $160.7 million | NPA were 0.07% of loans; allowance-to-loans ratio was 1.09%, versus 1.13% in 2018. Net charge-offs were 0.35% of average loans versus 0.30%. |
| Liquidity and funding | Year-end cash, cash equivalents and restricted cash: $907.8 million; deposits: $20.5 billion | Federal funds purchased and repurchase agreements totaled $1.85 billion; reported additional FHLB/Federal Reserve borrowing capacity was $3.55 billion. |
| Capital | Common equity Tier 1 ratio: 13.93%; total risk-based capital ratio: 15.48%; leverage ratio: 11.38% | All exceeded applicable well-capitalized thresholds. |
| Cash flows | Operating +$512.8 million; investing −$730.2 million; financing −$84.1 million | Cash, cash equivalents and restricted cash decreased $301.4 million during the year. |
Fourth-quarter 2019 net income attributable to Commerce Bancshares was $106.9 million, compared with $109.7 million in fourth-quarter 2018.
Material changes versus 2018
- Net interest income edged lower as deposit and borrowing costs rose faster than earning-asset yields. Deposit interest expense increased $27.3 million; borrowing expense increased $10.7 million. The net yield on earning assets declined to 3.48% from 3.53%.
- Loan interest income increased, supported by higher loan balances and yields, but investment-securities interest income declined. Average funding costs rose amid competition for deposits and higher average borrowing balances.
- Non-interest income benefited from trust-fee growth and an $11.5 million one-time gain on the fourth-quarter sale of the corporate trust business. Bank-card fees fell 2.2%, principally because of lower corporate-card fees.
- Credit costs increased: net charge-offs rose $7.4 million, mainly from consumer credit cards and a charge-off tied to one leasing customer. Non-performing assets nevertheless declined from $13.9 million to $10.6 million.
- Share repurchases increased materially: the company bought 4.7 million shares, including $150 million under an accelerated share repurchase. Common cash dividends per share rose 16.1%; a 5% stock dividend was also issued.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management described its focus on core revenue growth, customer relationships, controlled expansion, technology, and customer satisfaction, while cautioning that historical trends may not predict future results.
- Commerce adopted the current expected credit loss standard (CECL) on January 1, 2020. Preliminary estimates indicated an immaterial retained-earnings impact and an allowance-to-loans ratio in a range of approximately 0.85%–1.05%, with an expected increase in the liability for off-balance-sheet commitments. Final adoption estimates remained subject to review.
- The company planned a 2020 conversion of its core customer and deposit systems. It warned that implementation could disrupt systems or customer service and lead to reputational, regulatory, litigation, or financial consequences.
- Interest-rate and liquidity exposure remain important: the Federal Reserve cut rates by 75 basis points in 2019. Management’s sensitivity scenarios showed differing results depending on rate movements and deposit attrition; higher assumed deposit runoff could reduce net interest income in rising-rate scenarios.
- The company has significant LIBOR-linked loans, derivatives, borrowings, and other instruments and was preparing for the expected transition away from LIBOR after 2021. Contract repricing, fallback language, and related disputes were identified as risks.
- Off-balance-sheet commitments included $11.2 billion of commitments to extend credit and $377.3 million of standby letters of credit. Management did not anticipate material losses from these commitments. It also had $160.9 million in state tax-credit purchase commitments expected to be funded in 2020.
- Other identified risks include regional economic downturns, competition, credit losses, interest-rate changes, securities valuation, cyberattacks, reliance on third-party vendors, regulation, and dependence of the parent company on dividends from the bank subsidiary.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for collectively evaluated loans was identified as a critical audit matter because of estimation uncertainty and management judgment.
Most important facts for investors to verify
- Whether core-system conversion proceeded on schedule and without material customer, operational, or regulatory disruption.
- The final CECL adoption adjustment and subsequent allowance levels, provision expense, and credit trends—especially credit-card losses, business lending, and identified potential problem loans.
- Whether deposit costs and funding mix stabilize, and how net interest income responds to rate changes and deposit attrition.
- How much of 2019 revenue growth depended on the $11.5 million corporate trust sale gain and whether recurring trust and card revenues sustain momentum.
- Capital and liquidity after substantial repurchases and dividends, including continued access to borrowing capacity and the stability of corporate and larger certificates of deposit.
- Progress on LIBOR contract remediation and exposure to the reported credit commitments, tax-credit commitments, and pending legal matters.