What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2023-02-22 compared with 2022-02-23 · 47 added, 65 removed, 148 unchanged (43% of the section changed)

4 unchanged sentences

The concentration of the Company’s banking business in the United States particularly exposes it to downturns in the U.S.

Almost two years into the COVID-19 pandemic, the uncertainty in the economic outlook as of December 31, 2021 continued to affect the Company's financial results and operations.

In particular, the Company may face the following risks in connection with market conditions:

• In 2020, the U.S.

economy entered a recession, driven by the onset of the COVID-19 pandemic and the mitigating strategies implemented to attempt to prevent the transmission of COVID-19.

economy improved significantly in 2021.

However, the COVID-19 pandemic has not yet subsided and could continue to materially and adversely impact the U.S.

economy is affected by global events and conditions, including the COVID-19 pandemic.

• In 2022, the United States economy saw an uneven year.

Consumer spending and corporate profit growth were resilient despite high inflation, rising geopolitical tensions, and supply chain disruptions.

The Federal Reserve responded to persistently high inflation by raising its benchmark interest rate in a series of hikes starting in March 2022 and continuing into 2023.

While unemployment levels remained low during 2022, an increasing number of companies, especially in the technology sector, announced layoffs toward the end of 2022 and into 2023.

The pace of inflation slowed late in 2022, but the probability of a looming recession appears to be growing, as many economists are now predicting a recession in 2023.

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.

1 unchanged sentence

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 credit losses and provision for credit losses, as a significant part of the Company’s business includes consumer and credit card lending.

• In addition to the COVID-19 slowdown noted above, further slowdowns in economic activity may cause additional 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 expected 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.

These could impact the Company’s future provision for credit 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 credit losses 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.

11 unchanged sentences

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.

These new competitors may lower fees to grow market share, which could result in a loss of

Table of Conte nts

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.

30 unchanged sentences

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.

As a result of the COVID-19 pandemic, the Federal Reserve Board lowered the benchmark interest rate to between zero and 0.25%.

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.

As the economy rebounded from the COVID-19 pandemic-induced recession, strong inflation in 2022 caused the Federal Reserve Board to significantly increase the benchmark interest rate from nearly zero to between 4.25% and 4.50%.

Future economic conditions or other factors could shift monetary policy resulting in additional increases or decreases in the benchmark

Table of Conte nts

Furthermore, changes in interest rates could result in unanticipated changes to customer deposit balances and adversely affect the Company’s liquidity position.

Commerce Bancshares, Inc.

14 unchanged sentences

A LIBOR impact and risk assessment has been performed, and the Company has developed and prioritized action items.

All financial contracts that reference LIBOR have been identified and are being monitored on an ongoing basis.

The process of remediating these contracts has started.

LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation for the transition from LIBOR.

Changes to the Company's systems have been identified, and the process of installing and testing code was started in the third quarter of 2021.

The process of installing and testing code on impacted systems is expected to be completed in 2022.

The Company has a significant number of loans, derivative contracts, and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR, mostly 1-month LIBOR.

As of December 31, 2021, the Company had approximately $1.9 billion of commercial loans, $1.4 billion of derivative contracts (notional value), and $840 million of investment securities that are expected to mature after June 30, 2023.

These amounts will decrease in future periods as the Company works with customers to replace contracts that use LIBOR with alternative reference rates.

All of the Company's financial contracts that reference LIBOR have been identified, and LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation for the cessation of LIBOR.

Significant progress has been made in converting loans that reference LIBOR to an alternative reference rate during 2022.

Additionally, changes to the Company's systems to utilize alternative reference rates were completed in 2022.

The Company has loans, derivative contracts, and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR, mostly 1-month LIBOR.

As of December 31, 2022, the Company had approximately $1.0 billion of commercial loans, $948 million of derivative contracts (notional value), and $691 million of investment securities that are expected to mature after June 30, 2023.

These amounts are expected to decrease as the Company continues to work with customers to replace contracts that use LIBOR with alternative reference rates.

The Company ceased entering any new loan contracts that use USD LIBOR as a reference rate in December 2021.

The impact of alternatives to LIBOR on the valuations, pricing and operation of the Company's financial instruments is not yet known.

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.

7 unchanged sentences

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.

Table of Conte nts

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.

13 unchanged sentences

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 converted its core customer and deposit systems during 2022 and may encounter significant adverse developments.

The Company replaced its core customer and deposit systems and other ancillary systems (collectively referred to as core system) during the first quarter of 2022.

The core system is used to track customer relationships and deposit accounts and 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 provides a platform based on current technology, enables the Company to integrate other systems more efficiently, and is a significant improvement compared to the Company's previous core system.

The initial conversion was completed successfully, however, the Company may face operational risks in the months following conversion, including disruptions to its technology systems, which may adversely impact customers.

The Company has plans, policies and procedures designed to prevent or limit the risks of a failure after the conversion of its 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 the Company's reputation, result in a loss of customer business, subject the Company to regulatory scrutiny, or expose it 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.

The allowance for credit losses may be insufficient or future credit losses could increase.

1 unchanged sentence

See Note 2 to the consolidated financial statements and the section captioned “Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments” 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 credit losses on loans and the liability for unfunded lending commitments at December 31, 2022.

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 and utilizes a life of loan loss concept and required significant operational changes, especially in data collection and analysis.

The level of the allowance is 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.

The Company's estimate of credit losses utilizes a life of loan loss concept, and the level of the allowance is 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.

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.

Additionally, the volatility of the Company's provision for credit losses may change from year to year 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.

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.

5 unchanged sentences

This could result in significant losses.

Table of Conte nts

Strategic Risk

10 unchanged sentences

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.

The Company’s data is maintained on its own systems and on the systems of its vendors, business partners and third-party service providers.

The Company relies on a layered system of security controls to secure collection, transmission, storage, and retrieval of data, including confidential data, in its computer systems and the systems of third parties.

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.

The Company has faced security incidents, which have been minor in scope and impact, and it expects unauthorized parties to continue to attempt to gain access to its systems or information, as well as those of its business partners and service providers.

The Company makes significant investments in various technology to identify and prevent intrusions into its information systems.

The Company has policies, procedures and controls designed to identify, protect, detect, respond, and recover from security incidents.

The Company also requires ongoing security awareness training for employees, hosts tabletop exercises to test response readiness, and performs regular audits using both internal and outside resources.

However, there can be no assurance 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.

In addition to unauthorized access, denial-of-service attacks or other operational disruptions could 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.

2 unchanged sentences

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.

During 2022, the Company replaced its core customer and deposit systems and other ancillary systems (collectively referred to as "core system").

While the conversion was completed successfully, the Company may face operational risks after the conversion, including disruptions to its technology systems, which may adversely impact 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.

The Company may encounter significant problems in effectively implementing 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.

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.

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.

Table of Conte nts

The Company must attract and retain skilled employees.

2 unchanged sentences

Companies throughout the U.S.

saw significant turnover during 2021, and the number of candidates in the job market was generally much lower than the demand for talent.

saw significant turnover during 2021 and into 2022, and the number of candidates in the job market was generally much lower than the demand for talent.

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.

Public health threats or outbreaks of communicable diseases have adversely affected, and are expected to continue to adversely effect, the Company's operations and financial results.

Public health threats or outbreaks of communicable diseases could have an adverse effect on the Company's operations and financial results.

The Company may face risks related to public health threats or outbreaks of communicable diseases.

A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and the Company’s financial performance.

For example, the ongoing global COVID-19 pandemic has destabilized the financial markets in which the Company operates and may continue to cause significant disruption in the global economies and financial markets, including the Company's local markets.

The Company is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions.

In reaction to and as preventative measures to attempt to slow the spread of the pandemic that began in 2020, government authorities in many states and municipalities implemented mandatory closures, shelter-in-place orders, and social distancing protocols, including orders within many of the geographic areas that the Company operates.

Although the Company is considered an essential business, access to its branches and office locations were previously and may again be restricted, for the safety of its employees and customers.

Restricting customers' access to the Company's physical business locations has limited some customers from transacting with the Company and lowered demand for certain lending and other services offered by the Company and could continue to do so for an indefinite period of time.

Conversely, the ongoing COVID-19 pandemic has increased demand for certain other products and services, requiring the Company to pivot its focus in certain strategic initiatives.

The Company's ability to meet customer demand in this changing environment could result in increased expenses, and this could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity.

In particular, the continued spread of COVID-19 and efforts to contain the virus could:

• continue to impact customer demand of the Company’s lending and related services, leading to lower revenue;

• cause the Company to experience an increase in costs as a result of the Company implementing operational changes to accommodate its remote workforce;

• cause delayed payments from customers and uncollectible accounts, defaults, foreclosures, and declining collateral values, resulting in losses to the Company;

• result in losses on the Company's investment portfolio, due to volatility in the markets and lower trading volume driven by economic uncertainty;

• cause market interest rates to continue to decline, which could adversely affect the Company's net interest income and profitability;

• cause the Company's credit losses to grow substantially;

• impact availability of qualified personnel;

• cause other unpredictable events.

The situation surrounding the COVID-19 pandemic remains uncertain and the potential for a material impact on the Company’s results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels in the United States and globally.

The Company continues to adapt to the changing dynamics of the COVID-19 impacts to the economy and the needs of its employees and customers.

New information regarding the severity of the COVID-19 pandemic and ongoing reactions to the pandemic by customers, vendors, and government authorities will continue to impact access to the Company's business, as well as the economies and markets in which the Company operates.

For example, the global COVID-19 pandemic caused significant disruption and harm to the economy and the financial markets in which the Company operates.

The situation surrounding the COVID-19 pandemic remains uncertain.

While the U.S.

economy improved significantly during 2021, t he COVID-19 pandemic or fallout from economic and societal changes resulting from the pandemic may cause prolonged global or national recessionary economic conditions, which could have a material adverse effect on the Company's business, results of operations and financial condition.

Beyond the current COVID-19 pandemic, the potential

impacts of epidemics, pandemics, or other outbreaks of an illness, disease, or virus could therefore materially and adversely affect the Company's business, revenue, operations, financial condition, liquidity and cash flows.

economy has rebounded significantly since the peak of the pandemic-induced recession, fallout from economic and societal changes resulting from the pandemic may cause prolonged global or national recessionary economic conditions, which could have a material adverse effect on the Company's business, results of operations and financial condition.

Beyond the impact of the COVID-19 pandemic, the potential impacts of future epidemics, pandemics, or other outbreaks of an illness, disease, or virus could therefore materially and adversely affect the Company's business, revenue, operations, financial condition, liquidity and cash flows.

Our business and financial results may be affected by societal and governmental responses to climate change and related environmental issues.

10 unchanged sentences

UNRESOLVED STAFF COMMENTS

Table of Conte nts

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors