What changed in this filing

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Item 1A. Risk Factors

2024-02-22 compared with 2023-02-22 · 64 added, 54 removed, 141 unchanged (46% of the section changed)

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

• 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.

• In 2023, the United States ("U.S.") economy faced a series of challenges, including high inflation, rising interest rates, and slowing economic growth.

Uncertainties about global geopolitical tensions and volatile financial markets raised concerns about the potential for a recession in the U.S.

Despite these challenges, the U.S.

economy was resilient in 2023 with stronger-than-expected results in the fourth quarter, including a robust labor market and a rallying stock market.

economy is affected by global events and conditions, including U.S.

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• 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.

• While the COVID-19 pandemic appears to be over, the impact on businesses is still uncertain.

During the pandemic, there was a shift from in-office work to remote work.

This shift appears to be permanent for some businesses and partial for others.

As a result, businesses are reevaluating their office space needs and, in some cases, reducing their leased office space, selling commercial office buildings, or leasing space no longer needed.

The impact of this shift is not fully known and could result in reduced demand for office space, lower lease rates for office space, and lower values of office buildings.

These factors may contribute to higher delinquencies and net charge-offs for commercial office real estate loans.

Additionally, businesses that cater to or are located near dense areas of office buildings may be adversely impacted, which could result in higher delinquencies and net charge-offs for certain commercial borrowers.

• 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.

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Unlike larger national or other regional banks that are more geographically diversified, the Company provides financial services primarily throughout the states of Missouri, Kansas, central Illinois, Oklahoma, and Colorado.

It also has a growing presence in additional states through its commercial banking offices in:

Texas, Iowa, Indiana, Michigan, Ohio, and Tennessee.

It also has a growing presence in additional states through its offices in:

Texas, Iowa, Indiana, Michigan, Ohio, Florida, and Tennessee that serve commercial or trust customers.

As the Company does not have a significant banking presence in other parts of the country, a prolonged economic downturn in these markets could have a material adverse effect on the Company’s financial condition and results of operations.

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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

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customers and lower fee revenue for the Company.

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.

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.

The soundness of other financial institutions could adversely affect the Company.

The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institution counterparties.

Financial services institutions are interrelated because of trading, clearing, counterparty or other relationships.

The Company has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients.

Transactions with these institutions include overnight and term borrowings, interest rate swap agreements, securities purchased and sold, short-term investments, and other such transactions.

Because of this exposure, defaults by, or rumors or questions about, one or more financial services institutions or the financial services industry in general, could lead to market-wide liquidity problems and defaults by other institutions.

Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client, while other transactions expose the Company to liquidity risks should funding sources quickly disappear.

In addition, the Company’s credit risk may be exacerbated when the collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the exposure due to the Company.

Any such losses could materially and adversely affect results of operations.

Regulatory and Compliance Risks

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Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Company in substantial and unpredictable ways.

Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.

Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer, restrict the Company's ability to pay dividends, subject the Company to higher capital requirements, and/or increase the ability of non-banks to offer competing financial services and products, among other things.

During November 2023, the FDIC approved a final rule implementing a one-time special assessment to recover the loss to the DIF associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank earlier in 2023.

The Company accrued $16.0 million in the fourth quarter of 2023 for the special assessment.

Assessments driven by regulation, such as these, increased the Company's expenses in 2023 and additional assessments could further increase the Company's expenses.

Beyond the expense of additional regulation, failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.

While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

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Changes in Federal Reserve Board policies are beyond the Company’s control and difficult to predict, and such changes may result in lower interest margins and a lack of demand for credit products.

Climate-related and other Environmental, Social, and Governance ("ESG") developments could result in additional regulation and reporting for the Company.

In recent years, federal, state and international lawmakers and regulators have increased their focus on financial institutions' and other companies' risk oversight, disclosures and practices in connection with climate change and other ESG matters.

For example, in March 2022, the SEC issued a proposed rule on the enhancement and standardization of climate-related disclosures for investors.

The proposed rule would require public issuers, including the Company, to significantly expand the scope of climate-related disclosures in their SEC filings.

The SEC has also announced plans to propose rules to require enhanced disclosure regarding human capital management and board diversity for public issuers.

Liquidity and Capital Risks

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The Company's net interest income is the largest source of overall revenue to the Company, representing 64% of total revenue for the year ended December 31, 2023.

The interest rate environment in which the Company operates fluctuates in response to general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S.

The interest rate environment in which the Company operates fluctuates in response to general economic conditions and policies of various governmental and

regulatory agencies, particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S.

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 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

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As the economy rebounded from the COVID-19 pandemic-induced recession, high inflation experienced in 2022 continued into 2023.

In response, the Federal Reserve Board significantly increased the benchmark interest rate from nearly zero at the start of 2022 to between 4.25% and 4.50% at the end of 2022.

The Federal Reserve Board continued to raise interest rates at a more modest pace to between 5.25% and 5.50% by the end of July 2023.

Elevated rates have created competition for deposits and unrealized losses in fixed rate asset portfolios.

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

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

The soundness of other financial institutions could adversely affect the Company.

As demonstrated within the industry during 2023, the Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institution counterparties.

Financial services institutions are interrelated because of trading, clearing, counterparty or other relationships.

Transactions with these institutions include overnight and term borrowings, interest rate swap agreements, securities purchased and sold, short-term investments, and other such transactions.

Any such losses could materially and adversely affect results of operations.

Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank in March, resulted in decreased confidence in regional banks among deposit customers, investors, and other counterparties.

Additionally, these events caused significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets.

These events occurred during a period of rapidly rising interest rates, which, among other things, resulted in unrealized losses in the Company's available for sale debt securities portfolio and increased competition for bank deposits.

These events had, and could again have, adverse impacts on the market price and volatility of the Company’s stock.

These events could also lead to increases in the Company’s interest expense, as it has raised and may continue to raise interest rates paid to depositors in order to compete with other banks, and in an effort to replace deposits, seek borrowings which carry higher interest rates.

Bank failures during 2023 caused concern and uncertainty regarding the liquidity adequacy of the banking sector as a whole and resulted in some regional bank customers choosing to maintain deposits with larger financial institutions.

A significant reduction in the Company’s deposits could materially and adversely impact the Company’s liquidity, ability to fund loans, and results of operations.

In addition to customer deposits, the Company borrows on an overnight and short-term basis from third parties in the form of federal funds purchased and repurchase agreements and through lines of credit and borrowings from the FHLB and FRB.

If the Company were not able to access borrowings through those facilities due to an increase in demand from other banks or due to insufficient levels of pledgeable assets, its ability to borrow funds may be materially adversely impacted.

Commerce Bancshares, Inc.

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Operational Risks

The impact of the phase-out of LIBOR is uncertain.

In 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that LIBOR would likely be discontinued at the end of 2021 as panel banks would no longer be required to submit estimates that are used to construct LIBOR.

regulatory authorities voiced similar support for phasing out LIBOR.

On March 5, 2021, LIBOR’s regulator and its administrator announced that the publication of certain LIBOR tenors will cease immediately after December 31, 2021 and the remaining LIBOR tenors, including 1-month USD LIBOR, will cease immediately after June 30, 2023.

The Alternative Rates Reference Committee (the “ARRC”), a group of market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from LIBOR, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate.

The Company established a LIBOR Transition Program, which is led by the LIBOR Transition Steering Committee (Committee) whose purpose is to guide the overall transition process for the Company.

The Committee is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel.

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

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 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.

Furthermore, the Company may be faced with disputes or litigation with customers regarding interpretation and enforcement of fallback language used in loan agreements as the transition to a new benchmark rate continues to evolve.

The Company’s asset valuation may include methodologies, models, estimations and assumptions which are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect its results of operations or financial condition.

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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.

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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.

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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.

The Company maintains a portfolio of investments, which includes available for sale debt securities, trading securities, equity securities, and other investments.

Throughout 2023 and at December 31, 2023, the Company did not hold any investments classified as held-to-maturity.

The Company generally invests in liquid, investment grade securities, however, these securities are subject to changes in market value due to changing interest rates and implied credit spreads.

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This could result in significant losses.

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The Company could recognize losses on securities held in its securities portfolio, particularly if it were to sell a significant portion of its investments prior to maturity.

The Company's available for sale debt securities portfolio is carried at fair value, with unrealized gains and losses carried in accumulated other comprehensive income (loss) within shareholder's equity.

The fair value of investments, including available for sale debt investments, may change with changes in interest rates, credit concerns, or other economic factors.

Due to the rapid rise of interest rates during 2022 and 2023, the fair value of the Company's available of sale debt securities included a net unrealized loss of $1.2 billion at December 31, 2023.

As of December 31, 2023, the Company has the intent and ability to maintain its available for sale debt investments until recovery of their amortized cost basis.

However, if in the future the Company were to elect to sell or needed to sell the investments before the recovery of their amortized cost basis, the Company could realize significant losses in its income statement.

Strategic Risk

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Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on the Company’s financial condition and results of operations.

General Risks

Technology Risks

A successful cyber attack or other computer system breach could significantly harm the Company, its reputation and its customers.

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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.

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 prevent the Company from adequately serving customers.

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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.

As the Company completes system upgrades, it may face operational risks after system conversions, 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.

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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.

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General Risks

The Company must attract and retain skilled employees.

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Competition for the best people can be intense, and the Company spends considerable time and resources attracting, hiring, and retaining qualified people for its various business lines and support units.

Companies throughout the U.S.

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.

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Among the impacts to the Company could be a drop in demand for our products and services, particularly in certain industries.

In addition, the Company could experience reductions in creditworthiness on the part of some customers or in the value of assets securing loans.

In addition, the

Company could experience reductions in creditworthiness on the part of some customers or in the value of assets securing loans.

The Company’s efforts to take these risks into account in making lending and other decisions, including by increasing the Company’s business with climate-friendly companies, may not be effective in protecting the Company from the adverse impact of new laws and regulations or changes in consumer or business behavior.

UNRESOLVED STAFF COMMENTS

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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