Report of Independent Registered Public Accounting Firm
To the Plan Participants and Retirement Committee of Commerce Bancshares, Inc.
Commerce Bancshares Participating Investment Plan
Opinion on the Financial Statements
We have audited the accompanying statement of net assets available for benefits of the Commerce Bancshares Participating Investment Plan (the “Plan”) as of December 31, 2021, and the related statement of changes in net assets available for benefits for the year then ended and the related notes and schedule (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2021, and the changes in net assets available for benefits for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on the Plan’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Plan 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 the financial statements are free of material misstatement, whether due to error or fraud. The Plan is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Supplemental Information
The supplemental information contained in the accompanying Schedule of Assets (Held at End of Year) as of December 31, 2021, has been subjected to audit procedures performed in conjunction with the audit of the Plan's financial statements. The supplemental information is the responsibility of the Plan's management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole.
We have audited the accompanying statement of net assets available for benefits of the Commerce Bancshares Participating Investment Plan (the Plan) as of December 31, 2020, the related statement of changes in net assets available for benefits for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2020, and the changes in net assets available for benefits for the year then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Plan 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 the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
KPMG LLP
We served as the Plan’s auditor from 2011 to 2021.
The following description of the Commerce Bancshares Participating Investment Plan (the Plan) is provided for general informational purposes only. Terms of the Plan are more fully described in the Plan document, which is available to each participant. The Plan is a defined contribution plan that is qualified under section 401 of the Internal Revenue Code and covers employees of Commerce Bancshares, Inc. (the Company) or a participating subsidiary who are 21 years or older. Employees are eligible to participate as of the first day of the month following the completion of thirty days of service. The Plan is subject to the provisions of the Employee Retirement Security Act of 1974 (ERISA).
The Company is the plan sponsor and is advised by the Retirement Committee of Commerce Bancshares, Inc., which acts as the plan administrator. Commerce Bank, a subsidiary of the Company, is the trustee of the Plan. There were 4,469 and 4,571 participants with balances in the Plan at December 31, 2021 and 2020, respectively.
Contributions
Participating employees may elect to contribute to the Plan a maximum of 50% of their eligible compensation, as defined by the Plan, and subject to certain limitations under the Internal Revenue Code (IRS) (not to exceed $19,500 in 2021 and 2020). These participant contributions are made on a pre-tax basis. Effective July 1, 2013, the Company also offered employees the option to make Roth contributions. The Roth contributions made by the employee are included in the employees' income at the time deferred and are segregated with a separate Roth account within the Plan. The Roth contributions, together with the participants' pre-tax contributions, are subject to the limitations above. Additionally, participants who attained the age of 50 could contribute an additional $6,500 of catch-up contributions in 2021 and 2020. The catch-up contributions are not subject to the Company's matching contribution.
The Company's matching contribution is a graded matching percentage from 50% - 100% determined by age plus years of employment on the first 7% of eligible compensation. The Company makes true-up matching contributions to participants who contribute the IRS maximum before the end of the year and, as a result, would not receive the full employer matching contribution. Additionally, the Company may make a discretionary contribution. The Company made no discretionary contributions in 2021 or 2020.
Participants have the option to direct the investment of their contributions and the Company's matching contributions in any combination of the investment funds offered by the Plan. The funds offered as of December 31, 2021 are listed on page 13 of this report.
Participants may roll over funds into the Plan from any qualified plan, subject to the approval of the plan administrator. Rollover contributions earn investment income and share in investment gains or losses. Participants are 100% vested in rollover contributions. Participants direct the investment of their rollover contributions to any of the various investment options offered by the Plan. Effective July 1, 2013, participants may rollover Roth funds into a segregated Roth account within the Plan.
The largest investment fund within the Plan is the Commerce Bancshares, Inc. Common Stock Fund (Company Stock Fund). Assets of the Company Stock Fund are almost entirely comprised of Commerce
Bancshares, Inc. common stock. As a result, cash dividends on Commerce Bancshares, Inc. common stock are paid directly to the Company Stock Fund and allocated to the participants. Participants with balances in the Company Stock Fund have the option to reinvest their cash dividends in the Company Stock Fund or have dividends paid to them directly.
Participant Accounts
Each participant's account is credited with the participant's contribution, the Company's matching contributions, and an allocation of Plan earnings and administrative expenses. The earnings allocation is based on the performance of the participant's allocated investment fund balances. The benefit to which a participant is entitled is the vested portion of the participant's account.
Participants may make transfers between existing fund balances at any time, subject to individual fund restrictions. These transactions are done in 1% increments or specific dollar amounts. Participating employees may change future investment elections at any time upon notification to the Plan. These transactions are done in 1% increments.
Participant Vesting
Participants are vested immediately in their contributions plus actual earnings thereon, however, only upon termination of employment are participants entitled to receive their contributions and accumulated earnings thereon. Current Company matching contributions are subject to the following vesting schedule:
Years of vesting service
Percentage vested
Less than 3
0
%
3 or more
100
A participant will become fully vested in the value of all Company contributions in the event of death, permanent and total disability, or retirement on or after age 65, regardless of the participant's years of vesting service. A year of vesting service generally is each Plan year during which the participant earns at least 1,000 hours of service and is over the age of 18.
Forfeitures
Forfeitures are based on the nonvested portion of the Company's contribution upon employee termination. Forfeited amounts are applied as a reduction of contributions by the Company. Forfeitures were used to reduce the Company's contribution by $682,897 in 2021, and $194,597 in 2020. The balance of unallocated forfeitures available to offset future Company contributions amounted to $82,881 and $255,780 at December 31, 2021 and 2020, respectively.
Notes Receivable from Participants
A participant may borrow from the Plan amounts collateralized by the vested portion of his or her Plan account. These loans may not exceed the lesser of $50,000 or 50% of the participant's vested account balance (excluding employee stock ownership plan account balances). The loans are repaid through payroll deductions over terms which are based upon the amounts borrowed and normally do not exceed five years. The loans are secured by the balance in the participant's account. Interest rates charged on participant loans are based on the Commerce Prime Rate plus 1% at the date of the distribution and are fixed throughout the life of the loan. At December 31, 2021, interest rates on the loans outstanding ranged from 4.25% to 8.50%. The participant may continue to make contributions to the Plan throughout the term of the loan.
Certain administrative functions are performed by officers or employees of the Company. No such officer or employee receives compensation from the Plan. Administrative expenses incidental to the administration of the Plan may be paid by the Company, and, if not paid by the Company, shall be paid by the Plan. Setup fees for new loans and investment advisory fees are deducted from the respective participant's account. The Company elected to pay substantially all other administration fees for the years ended December 31, 2021 and 2020.
Distributions
Distributions of vested account balances are available upon termination, retirement, death or permanent and total disability. Distributions are made in lump sum or systematic amounts to the participant or designated beneficiaries based on participant election.
(2)Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis in conformity with U.S. generally accepted accounting principles.
Investments
The Plan's investments are held in an account at Fidelity Management Trust Company. On each valuation date, as defined by the Plan, securities held by the Plan are valued at fair value, and the increase or decrease in the value of securities held, plus any net income or loss, is allocated to the participant's accounts. Refer to the Fair Value Measurements note for additional valuation information.
Net appreciation in fair value of investments includes realized and unrealized gains and losses. Also included is the reinvestment of interest and dividends earned on funds invested in the money market and Company Stock funds. Purchases and sales of securities are recorded on a trade-date basis (the date the order to buy or sell is executed). Interest is accrued as earned and dividend income is recorded on the ex-dividend date.
Notes Receivable from Participants
Loans to participants are carried at amortized cost and are measured as the unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are reclassified as distributions, based upon the terms of the Plan document.
Use of Estimates
The Plan utilizes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare its financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.
Payment of Benefits
Distributions to the participants of the Plan are recorded when paid.
The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants' account balances and the amounts reported in the statements of net assets available for benefits.
During 2021, the ongoing global Coronavirus Disease 2019 (COVID-19) pandemic destabilized global financial markets and created significant volatility in investment values and investment income. While the situation surrounding the COVID-19 pandemic has improved as of the date of this report, the ongoing situation remains uncertain and may continue to cause significant disruption in the global economies and financial markets, which could adversely impact the Plan’s investments, investment income, and net assets available for benefits. The ultimate extent of the impact on the Plan’s investments and net assets available for benefits will depend on future developments, which are uncertain and cannot be predicted.
(4)Company Stock Fund
The Company Stock Fund is accounted for on a unit accounting basis. The fund has a cash reserve in order to provide the liquidity necessary to process daily fund transactions by the close of market each business day. The cash reserve generally represents between one and five percent of the total fund value and varies depending upon account activity. The reserve may consist of cash or cash equivalents. As of December 31, 2021 and 2020, the cash reserve totaled $5,634,703 and $5,165,990 respectively.
In January 1995, all assets held by the Company's qualified employee stock ownership plan were merged into the Plan and remain under a portion of the Plan that qualifies as an employee stock ownership plan (ESOP). All Company common stock attributable to the ESOP has been fully allocated to participant account balances and is held as units of the Company Stock Fund. At December 31, 2021 and 2020, 419 and 460 participants, respectively, had an ESOP related account balance.
Information about changes in ESOP assets included in the Company Stock Fund for the years ended December 31, 2021 and 2020, is as follows:
2021
2020
Beginning balance
$
31,788,216
$
34,639,502
Net appreciation in fair value of
investments
3,150,233
1,076,858
Distributions to participants
(3,724,450)
(3,928,144)
Ending balance
$
31,213,999
$
31,788,216
In addition, the Company Stock Fund utilizes available cash from participant and employer directed contributions and dividends to purchase Commerce Bancshares Inc. common stock on the open market. During 2021 and 2020, total dividends paid on shares of Company stock held by the Company Stock Fund and the amount thereof which was distributed directly to the participants is as follows:
In a determination letter dated March 1, 2016, the Internal Revenue Service stated that the Plan met the requirements of section 401(a) of the Internal Revenue Code (IRC) and the Trust established thereunder was exempt from federal tax under section 501(a) of the IRC. Although the Plan has been amended since receiving the determination letter, the plan administrator believes that the Plan, as designed and operated, is in compliance with the applicable provisions of the IRC.
The Company is entitled to deduct for federal income tax purposes the amount of contributions made by the Company and each of its participating subsidiaries for the benefit of employees. In general, neither such contributions nor the income from the trust will be taxable to participants as income prior to the time such participants receive a distribution from the Plan. Participant contributions are not required to be included in the employees' taxable income until the year or years in which they are distributed or made available to them, with the exception of participant contributions to Roth accounts which are included in employees' income at the time deferred.
U.S. generally accepted accounting principles require Plan management to evaluate tax positions taken by the Plan and recognize a tax liability if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Plan administrator has analyzed the tax positions taken by the Plan and has concluded that as of December 31, 2021 and 2020, there are no uncertain positions taken or expected to be taken that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examinations for years prior to 2018.
(6)Transactions with Related Parties
Certain Plan investments are shares of a mutual fund managed by The Commerce Trust Company, a division of Commerce Bank. The Company Stock Fund also includes shares of Company common stock. Transactions in these funds qualify as party-in-interest transactions. Plan investments also include shares of mutual funds managed by Fidelity Management Trust Company, custodian of the Plan, and Fidelity Investments Institutional Operations Company, Inc., record keeper of the Plan. Transactions in these funds are exempt party-in-interest transactions under ERISA.
Transactions with the Company and its affiliates during the years ended December 31, 2021 and 2020 were as follows:
The Plan follows the Financial Accounting Standards Board's (FASB) guidance for fair value measurements. Under this guidance, fair value is defined as 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 Plan 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 unadjusted 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 Plan'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 Plan 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 Plan looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Plan looks to market observable data for similar assets and liabilities. To the extent certain assets and liabilities are not actively traded in observable markets, the Plan would use alternative valuation techniques to derive an estimated fair value measurement.
Following is a description of the Plan's valuation methodologies used for assets measured at fair value on a recurring basis:
Common Stock
Common stocks are valued at the closing price reported on the active market on which the individual securities are traded. Because the measurements utilize quoted prices in an active market, they are classified as Level 1.
Mutual Funds
Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed be actively traded and their measurements are classified as Level 1.
The stable value funds held by the Plan are managed by Fidelity Management Trust Company. Only qualified, participant-directed, defined contribution plans may invest in the funds. The funds invest in benefit-responsive investment contracts issued by insurance companies and other financial institutions, fixed income securities, and money market funds. The funds seek to maintain a stable net asset value of $1 per share but they cannot guarantee that they will be able to do so. In order to maintain the net asset value upon the occurrence of certain events, the funds and their participants are subject to certain restrictions. The stable value funds held by the Plan, which are reported at their readily determinable fair value, are classified as Level 1.
The following tables set forth by level, within the fair value hierarchy, the Plan's assets at fair value as of December 31, 2021 and 2020. There were no transfers between levels in the hierarchy in 2021 or 2020.
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100% vested in their employer contributions.
(9)Plan Amendment
During 2021, the Company amended the Plan to adopt three provisions outlined in the Corornavirus Aid, Relief and Economic Security (“CARES”) Act. The first provision allows “qualified participants” to withdraw up to $100,000 or their eligible balance. The second provision increases the maximum loan limit for “qualified participants” to the lesser of $100,000 or 100% of their vested account balance. The third provision allows “qualified participants” to delay loan repayments (for both existing loans and CARES Act loans outlined above) through December 31, 2020. In addition to the CARES Act provisions amendments, the Company amended the Plan to allow for in-service distributions from a participant's accounts, both after-tax and pre-tax, upon attaining age 65. There were no significant amendments to the Plan during 2020.
(10)New Accounting Pronouncements
The Financial Accounting Standards Board (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. The guidance was effective January 1, 2020, and the Plan adopted the new guidance on that date. The adoption did not have a significant effect on the Plan's financial statements.
(11)Subsequent Events
The Plan has evaluated subsequent events from the date of the statement of net assets available for benefits through June 23, 2022, the date at which the financial statements were available to be issued, and determined that there are no additional items to disclose.
23.1 Consent of Independent Registered Public Accounting Firm - Armanino LLP
23.2 Consent of Independent Registered Public Accounting Firm - KPMG LLP
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
