Commerce Bancshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. Commerce Bancshares is a regional bank holding company operating mainly in the lower Midwest, with Commercial, Consumer and Wealth segments.
Financial results and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net interest income | $942.2 million | $835.4 million | Up 12.8% |
| Non-interest income | $546.5 million | $560.4 million | Down 2.5% |
| Total revenue (net interest income plus non-interest income) | $1,488.7 million | $1,395.8 million | Up 6.7% |
| Provision for credit losses | $28.1 million expense | $66.3 million recovery | $94.4 million higher expense |
| Non-interest expense | $848.8 million | $805.9 million | Up 5.3% |
| Net income attributable to Commerce Bancshares | $488.4 million | $530.8 million | Down 8.0% |
| Diluted earnings per share | $3.85 | $4.11 | Down 6.3% |
- Net interest margin on a fully taxable-equivalent basis was 2.85%, versus 2.58% in 2021. Average interest-earning asset yields rose 41 basis points, while funding costs rose 23 basis points.
- Return on average assets was 1.45% (1.55% in 2021); return on average common equity was 17.31% (15.37%). Efficiency ratio improved to 56.9% from 57.6%.
- At year end, assets were $31.9 billion, loans $16.3 billion, deposits $26.2 billion and total equity $2.5 billion. Loans grew 7.4%; period-end deposits fell 12.2%, and assets declined from $36.7 billion.
- Asset quality remained low-risk by reported measures: non-performing assets were $8.4 million, or 0.05% of loans; net charge-offs were $19.1 million, or 0.12% of average loans. The allowance for loan losses was $150.1 million, 0.92% of loans, and the unfunded-commitment liability was $33.1 million.
- Operating cash flow was $559.4 million. Cash, cash equivalents and restricted cash decreased $3.4 billion to $897.8 million, principally reflecting deposit outflows. Investing activities provided $242.3 million; financing activities used $4.2 billion.
- Period-end deposits were $26.2 billion, including $11.3 billion estimated uninsured deposits. Average loans-to-deposits ratio was 55.4%. Management reported $2.1 billion of available FHLB and Federal Reserve borrowing capacity.
- Short-term borrowings, primarily repurchase agreements, totaled $2.84 billion; other borrowings were $9.7 million. The Bank had no FHLB advances outstanding at year end and the Company reported no significant long-term debt.
- Regulatory capital remained above well-capitalized thresholds: consolidated CET1 ratio 14.13%, total risk-based capital ratio 14.89%, and leverage ratio 10.34%. Tangible common equity to tangible assets was 7.32%, down from 9.01%.
- Selected Q4 2022 results: net income attributable to Commerce Bancshares was $131.6 million and diluted EPS was $1.04; net interest income was $254.6 million. Q4 provision for credit losses was $15.5 million, compared with a $7.1 million recovery in Q4 2021.
Material changes versus 2021
- Higher loan and investment-security yields drove net interest income growth, partly offset by increased deposit and borrowing costs.
- Net income declined despite revenue growth, principally because the prior-year credit-loss recovery did not recur; expenses rose and non-interest income fell. The largest fee-income decline was in loan fees and sales, mainly reflecting lower mortgage banking revenue.
- Available-for-sale securities shifted from a $30.9 million net unrealized gain in 2021 to a $1.5 billion net unrealized loss at year end 2022, primarily from rising interest rates. The decline was reflected largely in other comprehensive income; no credit-loss expense was recorded on those securities.
- Deposits declined $3.6 billion and the balance at the Federal Reserve fell substantially. Loans grew, including commercial construction and business real estate lending.
- The Company recorded $20.5 million of net investment securities gains, including $43.8 million of private-equity fair-value gains partly offset by $20.3 million of losses on available-for-sale bond sales.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. The allowance forecast assumed a mild 2023 recession, with high inflation and borrowing costs, stalled job growth and possible job losses. Management stated it believed liquidity was adequate and expected approximately $2.4 billion of investment-security maturities and paydowns during 2023.
- Interest-rate sensitivity is material. In the year-end model with deposits held constant, a 100-basis-point rate rise had a 0.38% positive modeled effect on net interest income, while a 100-basis-point fall had a 2.2% negative effect. An alternate scenario incorporating deposit attrition modeled a 1.71% decline for a 300-basis-point rise. These are scenarios, not forecasts.
- Key risks include deposit competition and outflows, interest-rate and liquidity exposure, recession-driven credit deterioration, commercial real estate and construction lending, securities valuation losses, and concentration in the Company’s regional markets. The $1.5 billion securities loss could weigh on capital and financial flexibility if securities must be sold before recovery.
- Other disclosed risks include cyberattacks and vendor disruption, post-conversion operational issues following the 2022 core banking system replacement, regulatory change, and completion of the LIBOR transition. About $1.0 billion of commercial loans, $948 million of derivative notional and $691 million of securities were identified as LIBOR-linked instruments expected to mature after June 2023.
- Off-balance-sheet commitments included $14.3 billion of commitments to extend credit and $555.9 million of standby letters of credit; many commitments may expire undrawn. The Company reported $121.8 million of state tax-credit purchase commitments expected to be funded in 2023. Legal proceedings were described as arising in the ordinary course; loss accruals are recorded when probable and reasonably estimable.
- Shareholder returns included $127.5 million of cash dividends and $186.6 million of treasury-stock purchases. The regular cash dividend rose 6.1% in 2022; the Board authorized a 7.1% increase for the first quarter of 2023. A 5% stock dividend was also issued.
- The independent auditor gave unqualified opinions on the financial statements and internal control. Its critical audit matter was the estimation of the collective allowance for credit losses, which depends on historical losses, economic forecasts and qualitative adjustments.
Important facts for investors to verify
- Deposit trends, particularly uninsured and commercial balances, and the pace and cost of replacement funding.
- Whether the large unrealized securities losses remain unrealized, recover over time, or require sales that crystallize losses.
- Loan performance and allowance adequacy as the mild-recession forecast evolves, especially in commercial real estate, construction and consumer credit.
- Quarterly net interest margin and deposit pricing as rates change; compare actual results with the filing’s interest-rate and deposit-attrition scenarios.
- Progress and any customer or operational issues in the LIBOR transition and after the core banking-system conversion.
- Future capital ratios and tangible common equity, including the effects of AOCI, dividends and repurchases.