COMMERCE BANCSHARES INC annual report, FY2023

Commerce Bancshares, Inc. — 2023 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter filing. Commerce Bancshares is a regional bank holding company headquartered in Missouri, operating primarily in the lower Midwest through Commercial, Consumer and Wealth businesses. At year-end, it reported $31.7 billion in assets, $17.2 billion in loans, $25.4 billion in deposits and $3.0 billion in equity.

Key financial results

Metric20232022 / comparison
Net interest income$998.1 millionUp 5.9%
Non-interest income$573.0 millionUp 4.9%
Total revenue, as defined by the company$1.571 billionUp 5.5%
Net income attributable to Commerce Bancshares$477.1 millionDown 2.3% from $488.4 million
Diluted earnings per share$3.64Down from $3.67
Return on average assets / common equity1.49% / 17.94%1.45% / 17.31%
Net interest margin, fully taxable-equivalent basis3.16%2.85%
Efficiency ratio59.17%56.90%
Net loan charge-offs$31.1 million; 0.19% of average loans$19.1 million; 0.12%
Operating cash flow$488.8 million$559.4 million

Fourth quarter. Net income attributable to the company was $109.2 million, or $0.84 diluted per share, versus $131.6 million, or $1.00 per share, in fourth-quarter 2022. Fourth-quarter net interest income was $248.4 million, compared with $254.6 million a year earlier. The filing does not provide a separate full set of fourth-quarter balance-sheet metrics.

Financial position, liquidity and capital

  • Loans grew 5.5% to $17.2 billion. Year-end deposits fell 3.1% to $25.4 billion; average deposits declined 9.9%. The average loans-to-deposits ratio was 66.3%.
  • Non-interest-bearing deposits fell to 31.4% of deposits from 38.4%. Uninsured deposits totaled $10.8 billion, compared with $11.0 billion in 2022.
  • Borrowings were $2.91 billion, primarily $2.65 billion of repurchase agreements and $261 million of federal funds purchased. No FHLB advances were outstanding at year-end; the company reported no significant long-term debt.
  • Reported liquid assets totaled $12.38 billion, including $2.24 billion in Federal Reserve balances and $9.68 billion in available-for-sale debt securities. The company reported $6.76 billion in available future FHLB and Federal Reserve borrowing capacity.
  • Available-for-sale securities had a $1.22 billion net unrealized loss at year-end, down from $1.50 billion in 2022. Management stated it had the intent and ability to hold the portfolio until recovery; it recognized no credit-loss expense on these securities in 2023.
  • Consolidated capital ratios were 15.25% Tier 1 common risk-based, 16.03% total risk-based and 11.25% Tier 1 leverage. The Bank exceeded regulatory well-capitalized thresholds.
  • Cash, cash equivalents and restricted cash increased $1.79 billion to $2.69 billion. Investing activities provided $2.18 billion, while financing activities used $883 million, largely reflecting deposit outflows, dividends and share repurchases.

Material changes versus 2022

  • Higher loan yields and rates on Federal Reserve balances lifted net interest income, but deposit and borrowing costs rose sharply. Average funding costs increased faster than earning-asset yields, while the net interest margin nevertheless improved.
  • Non-interest expense rose 9.7% to $931.0 million. Deposit insurance expense increased to $33.2 million, including a $16.0 million fourth-quarter FDIC special assessment; salaries and benefits also increased.
  • Credit costs increased: loan provision was $43.3 million versus $19.2 million, and net charge-offs rose, primarily from credit card and consumer lending. Non-performing assets remained low at $7.6 million, or 0.04% of loans.
  • Non-interest income growth was led by bank card and trust fees. Net investment securities gains declined to $15.0 million from $20.5 million, including lower private-equity fair-value gains and losses on sales of available-for-sale bonds.
  • The available-for-sale portfolio contracted, with amortized cost falling to $10.9 billion from $13.7 billion. Deposits shifted toward interest-bearing accounts and certificates of deposit.
  • The company acquired municipal bond underwriter and advisor L.J. Hart & Company in the second quarter; the acquisition added $7.6 million of goodwill.

Outlook, management commentary and risks

The filing provides no formal earnings or net-interest-income guidance. Management’s credit-loss forecast assumed the U.S. economy would slow at the start of 2024 without entering a recession, with unemployment projected at 4.1%–4.5% during the forecast period. Management highlighted uncertainty around tighter policy, consumer spending, inflation and economic conditions. The filing cautions that actual results may differ materially from forward-looking statements.

  • Funding and rates: Deposit competition, higher funding costs, deposit outflows and changes in Federal Reserve policy could pressure liquidity and net interest income. The company’s interest-rate simulations showed lower projected net interest income under each modeled up- and down-rate scenario.
  • Credit: Charge-offs rose, particularly in credit cards and consumer loans. Management also identified commercial real estate and office-property risks, as well as uncertainty in its credit-loss assumptions and economic forecast.
  • Securities: A forced sale of securities before recovery of amortized cost could cause significant income-statement losses. Rising rates have also created unrealized portfolio losses.
  • Other risks and contingencies: The filing identifies regulatory, competitive, cyber, vendor, valuation and broader economic risks. Legal proceedings are pending in the ordinary course; some are too early to estimate and no clear aggregate exposure is provided. The company also had $14.5 billion in loan commitments and $590.6 million in standby letters of credit; many commitments may expire undrawn.
  • Unusual items and returns: The company paid $1.03 per share in cash dividends, repurchased 1.35 million shares during 2023, and distributed its 30th consecutive 5% stock dividend. In February 2024, the board raised the regular cash dividend 5.1%. The financial statements received an unqualified audit opinion; the auditor identified the collective loan allowance as a critical audit matter.

Most important facts for investors to verify

  1. Whether deposit balances and mix stabilize, and whether uninsured deposits or funding costs increase.
  2. Whether loan charge-offs, delinquencies and the allowance for credit losses—especially in cards, consumer lending and commercial real estate—worsen.
  3. Whether the $1.22 billion unrealized securities loss can be carried until recovery without requiring sales or creating liquidity pressure.
  4. Whether revenue growth can offset expense inflation, including FDIC assessments, and support margins and earnings.
  5. The eventual funding and financial effects of off-balance-sheet commitments, legal matters and other disclosed contingencies.