Commerce Bancshares, Inc. (CBSH) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Commerce Bancshares, Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to David Kemper, Executive Chairman of Commerce Bancshares. Mr. Kemper, the floor is yours.

Thank you. Good morning. The Annual Meeting of the Shareholders of Commerce Bancshares will please come to order. On behalf of your Board of Directors and the officers of your company, I'm pleased to welcome those virtually attending the 2025 Annual Meeting of the Shareholders. First of all, I'd like to introduce the members of your current Board of Directors. Terry Bassham, retired Executive Officer; and President of Evergy; Beau Brauer, President of Hunter Engineering; Kyle Chapman, President and Board member of Barry-Wehmiller Group; Karen Daniel, retired Chief Financial Officer and Executive Director of Black & Veatch; John Kemper, President and Chief Executive Officer of Commerce Bancshares; Jonathan Kemper, retired Chairman Emeritus Commerce Bank, Kansas City; June Fowler, retired Senior Vice President of Communications, Marketing and Public Affairs of BJC Healthcare; Ben Rassieur, President of Paulo Products; Todd Schnuck, Chairman of the Board and Chief Executive Officer of Schnuck Markets; Chrissy Taylor, President and Chief Executive Officer of Enterprise Mobility; and our nominee, Tim Dunn, Chairman of the Board and Chief Investment Officer of J.E. Dunn Construction Company. I'll call your attention to the rules of conduct set forth for this meeting. These were made available to each shareholder in the documents tab in the upper right corner of the screen. Before asking the secretary to present our report, any shareholders who have not submitted their proxies may do so at this time by clicking on the link provided online. Okay. I think we can proceed, Peggy. The online voting will now be closed. I'll ask our Secretary, Peggy Rowe to make her report. So Peggy?

An affidavit has been filed by our stock transfer agent stating that the notice of the annual meeting has been furnished to all shareholders of record as of February 26, 2025. The inspectors of election have filed with me their certificates stating that proxies representing 118,674,329 shares of the 134,074,101 outstanding shares have been received, so a quorum is present.

Thank you. The first matter to be presented to the shareholders today is the election of 1 director to 2027 Class of Directors to serve until the 2027 Annual Meeting. This time, I request the Secretary to present the nominations of the Board of Directors and the result of the voting.

Board of Directors nominated Benjamin F. Rassieur III to the 2027 Class of Directors to be elected at this meeting. No other nominations were received. Based on proxies submitted, the nominee has received a sufficient number of votes to elect him with a majority of votes cast. A final report of the actual votes cast will be available online in the next few days.

On the basis of the report presenter, the nominee has been elected to the Board for a term of 2 years to service the 2027 Annual Meeting. The second matter to be presented to the shareholders today is the election of 4 directors to constitute the 2028 directors -- Class of Directors to serve until the 2028 Annual Meeting. At this time, I'll ask the Secretary to present the nominations of the Board of Directors and the results of that voting.

The Board of Directors nominated Timothy S. Dunn, June McAllister Fowler, Todd R. Schnuck and Christine B. Taylor to the 2028 Class of Directors to be elected at this meeting. No other nominations were received. Based on proxies submitted, each of the nominees has received a number of votes sufficient to elect all nominees with the majority of the votes cast. A final report of the actual number of votes cast will be available online in the next few days.

On the basis of the report presented, the 4 nominees have been elected to the Board for the term of 3 years to serve until the 2028 Annual Meeting. The third matter is the ratification of the selection of KPMG LLC as the company's independent registered public accounting firm for 2025. Peggy?

KPMG LLC selection as the company's independent registered public accounting firm was ratified by over 98% of the shares voted. A final report of the actual number of votes cast will be available online in the next few days.

On the basis of the report presented, KPMG has been ratified as the company's independent registered public accounting firm for 2025. The next matter is the Say on Pay proposal, which is an advisory vote on the compensation awarded to certain executive officers.

Based on proxies submitted, votes for Proposal Four represented 91.83% of votes cast. A final report of the actual number of votes cast will be available online in the next few days.

On the basis of the Secretary's report, Proposal Four, approving the compensation awarded to certain executive officers passed. Proposal Four is an advisory vote and is not binding to the company, but it will be taken into consideration both by the compensation community and by the board as a whole. At this time, I'd like to introduce Stephen Penn and Jenny Pearson of KPMG of a public accounting firm who are attending the meeting virtually. Mr. Penn and Ms. Pearson will be available to answer any questions shareholders may have during the question period a little later in the meeting. And now I'd like to turn the meeting over to John Kemper, our President and CEO, for a state of the company presentation. So John?

Okay. Thank you very much. Good morning, everyone. It's great to be with so many of our shareholders this morning. Always a good time at this annual meeting. To reflect on the successes and some of the challenges of the past year, I think it's fair to say 2024 had its share both. But on the whole, it was a very good year for your company. The theme of our annual report this year is about a strategic mindset for growth and to me, that's all about the recipe that will create both profitable and sustainable growth for our company. We are very much committed to growth, but not for growth's sake alone, but because of the possibilities that it unlocks for our shareholders, for our customers and for team members who choose to make a career at Commerce. So I'm happy to be able to share some of the elements underpinning this growth strategy today. And for more still, please do take a look at our annual report that you can find on our investor website. I'll just offer the usual cautionary statement about forward-looking statements that you may hear today. And with that, I think we can step into the presentation itself. So in our time today, I'll try to cover 4 areas broadly. First, I want to just talk about Commerce at a high level. Then I want to talk about what we are seeing in the economy in the banking industry. Looking forward, we'll talk about how I think Commerce is positioned against this backdrop, economy and industry. And finally, we'll talk about our company's performance relative to the industry including a few thoughts on the playing field that seems to be changing pretty rapidly, but how we're thinking about competing and growing on this playing field. So first, about Commerce Bancshares, just offer up this sort of primer on a page about the bank and who we are. This is our -- we stand now in our 161st year in business. Our geographic footprint is really focused in the middle of the country, though we have certain businesses particularly in payments that span the entire country. You can see some of the end of year key numbers along the bottom of this page. So at about $32 billion. Commerce would be the 42nd largest bank by assets at the end of 2024. We are, however, the 21st largest by market capitalization at the end of the year. And as we've discussed in past years, the reason for that strong valuation relative to the gross size of the bank is that we make money in a number of ways that do not rely so heavily on our balance sheet. We have a large B2B and consumer payments business. We also have a large Wealth Management business. You can see on this page that we administered just shy of $75 billion in trust assets, which would be a top 20 position among banks in the country. We're also a very liquid, well-capitalized and I think safe bank, which not seems like it's not a bad thing to be in a world with the uncertainty that we face today. And you can see our baseline credit assessment that ranks among the highest in the country. Just a word about how we organize and how we go to market. We like to describe ourselves as operating as a super community bank. And to us, that means combining the best of both small and big banks. It means we strive to have the capabilities, the products, the sophisticated advice that you might find it a larger bank, but we want to deliver these things in the context of deep and extended relationships and with excellent customer service. Our bankers are empowered to take care of their customers, and they're deeply engaged in their communities. Sometimes this organizational model can be a tough thing to pull off, but we really think it's worth the effort. This has been a pretty distinctive niche for us. And the formula has been, I think, a winning one over time. You can see that in a number of metrics, looking at our engaged employees, our satisfied customers and I think our strong shareholder returns over time. I always like to start with what underpins all of this, and it really starts with our team and our distinctive culture. We try to very proactively shape that culture over time. to make sure that we are evolving in positive ways and striving always to improve. Ultimately, it's our shared values, which is what you see across the circles on this page, our shared language and our understanding of our shared direction that allows for us as a team to communicate and to execute effectively on our business model. But simply, that's how we win in the marketplace. Part of our culture has to do with the way that we support our communities and support each other. And when we try to measure these things, we look at teammate engagement and enablement and we find that we very consistently outpace industry and high-performing company norms. A lot of banks like to make headlines through financial investments and sponsorships and communities. We, of course, invest our financial capital like other banks, but we also invest our time, which is something that I'm equally proud of our teammates serve at last count on the boards of more than 500 nonprofit organizations in our communities and the bank has consistently received a CRA rating of outstanding for almost 30 years. We try not to read too many of our own press clippings, but I thought I'd just flagged some of the recent recognition for the bank just because I do think it's a reflection of our team members' hard work and collaboration. I've got just a couple of slides now about the economy and the banking environment. Worth noting I'm going to focus on 2024 here for a moment just because this is our annual meeting, and that is the year we're talking about. So it's the backdrop of our performance. So talking about 2024, it feels like a while ago at this point. But I think the headline here is that the year was a favorable operating environment for banks. We saw stable economic growth that was matched by a strong stock market and a surprisingly durable jobs market. Citing some progress on over the course of the year, the Fed did cut rates for the first time in 4 years. We saw a 100 basis point reduction in Fed funds toward the end of the year. which was constructive to many banks' earnings profile, particularly banks with higher funding costs. Throughout the year predictions of economic slowdown or recession proved to be off the mark and credit was largely benign, which was, again, a good thing for banks. Now as we sit here today, I think the forward outlook on the economy is a lot more uncertain. And in some ways, many would say unsettling. The prospect of wars and trade wars clearly could have significant and enduring impacts on the global economy, disrupting supply chains, creating inflationary impacts and perhaps anticipating this, consumer confidence has dipped notably in recent months. Following last year's cuts, the Fed, I think we all know, has been on pause in terms of rate cuts. The market is currently anticipating more cuts as we go through the year. But I think we all recognize that growing inflation could make this difficult for the Fed. So for banks, this is a challenging picture. I think one that points to slower growth and potentially to higher credit costs. And I think kind of zooming out the big picture here is that successful banks will need to anticipate and prepare for the downside risk. That means having ample capital, having plenty of liquidity and hopefully, having an earnings engine that is diversified and resilient. And I think in this regard, commerce is in very good shape, as we've said for a long time, our goal is to be there and to show up consistently for our customers through all economic cycles. And really, that's how we think about our risk appetite. I'll come back to our positioning in the current economic environment in a moment, but I want to tell you a little bit more about the ongoing investments that we're making in our businesses. In general, we think about our strategic posture as striking a balance between 2 things. First, continuously improving the functioning of our 160-year-old core bank. And then second, making innovative bets and investing in areas where we think we can drive growth over the long term. To meet these things work in harmony because if we get the continuous improvement part right in our core bank, getting more efficient, improving ourselves, building the best team and culture that we can it creates earnings and it buys us the capital to place longer-term bets. In our culture, we call these bets blue chips for the company. You can see some of those blue chips listed here on the right side of the page. Okay. I'll spend just a few minutes now walking through our 3 customer segments in our business. I'm going to begin with Consumer here. You can see a snapshot of our consumer business. We currently serve more than 800,000 households, representing $12.5 billion in deposits and nearly $4 billion in loans on our balance sheet, I should note these numbers exclude loan and deposits in our Wealth segment. We service these customers through a network of branches and ATMs. But increasingly, as you can see at the bottom of the page, our emphasis is on growing our digital channel. I think we're in good shape here. Just as 1 data point, our app has a 4.7 star rating in the Apple App Store, which puts us really on about the same footing as best-in-class banks in the marketplace. We're making a lot of technology investments guided by what our customers are asking for. You can see this in our rapidly improving digital offerings including many releases over the course of the year. We think of this digital platform is really being our customer front door in many ways. This area, as I said, has been a real focus for us in recent years. And really, that's in response to customers and their growing comfort and appetite for digital interaction. Now at the same time, we recognize that human connection is important and it's frequently cited as a key reason that customers choose to do business with us. I'm particularly proud of our Commerce CONNECT platform that allows customers to select a banker who is a real person, by the way, from within our app to work with and then interact with that banker via chat whenever they want help over have questions. I'll turn now to the commercial segment. And on the commercial side, you can see again here a snapshot of our loan and deposit footings, you can also see the revenue associated with this segment. Our capabilities in the commercial space span a broad array of products and services. And our goal is really to be the full service partner to any commercial customer that we have. That means helping them with credit, with deposits, with any services that they may require. I mentioned earlier the importance of our commercial payments franchise. I think this slide gives some dimension to that business. It's an area where we are regularly competing against the largest players in the industry. And finding that we're having a good deal of success. We really like this business because of the value it brings to our customers as well as the risk return characteristics that it delivers to our franchise. And within our payments business, it's fair to say Healthcare is our largest vertical in terms of customers that we serve. And I think you can get a sense here for just how national this business is in scale. We partner with 3,000-plus Healthcare providers, including more than 500 hospitals spanning 48 states. We have solutions that address the entire revenue cycle for providers and also include patient solutions that help to improve their experience. We also provide traditional banking services as well as investment management. These services -- sorry, the services market in Healthcare, I think many would tell you it's pretty crowded, especially with tech players. But we're finding that our identity as a stable bank that is really focused on this vertical and has compelling product offerings has been a pretty distinctive and compelling value proposition. A large part of our profitable growth in recent years has come from our so-called expansion markets by which we mean markets where we've really planted a flag in the last 10 or 15 years. You can see some of these markets enumerated on this page, and you can also get a sense for the loan growth over time. But just as important as the loan growth is the balanced growth of these franchises. You can see that in our fee numbers, which have doubled in the last 5 years. And to date, the lion's share of that fee growth has been driven through the commercial segment. But it's worth noting we are growing our wealth management footprint. And I think that will be a big part of our story in years to come in some of these geographies. A relatively new dot on the map incidentally is the opening of our Naples, Florida office, which is an outpost for our Wealth Management business in obviously a very attractive market where we already have a large number of customers. And that brings me to our third and our final business segment, which is the Wealth Management business. You can see where we stack up against bank-owned trust companies. Again, this is an area where we are, I think, outsized relative to our balance sheet. As of year-end, we oversaw about $75 billion in client assets, the majority of which we actively manage. This is a business with, again, a very nice financial return characteristics, relatively low risk and steady and doesn't consume a lot of our risk-based capital. More importantly, it's complementary to everything else that we do for our customers, families, commercial customers, institutions. It really helps us to build deep and enduring relationships with these customers. You can see some of the key growth initiatives in our wealth business under the banner of the Commerce Trust, laid out on the left side of the page here, these are related to investments in our systems and our people and also, as I mentioned, expansion into new geographies. Customer segmentation is really important in this business and our family of wealth-related brands. that you see on the right side of the page is, I think, a reflection of the tailored approach that we try to take to customers across the entire wealth spectrum. And just stepping back for a moment from our business segments and talking across the bank, I'd just like to close this section by noting some of the investments that we're making in the bank. Digital is the front door of the company I'm also happy to enumerate many of the significant investments that we're making in the back of the house, so to speak. We're doing that in an array of core applications. One of the nice things about this bank's steady earnings profile is that over time, it's allowed us to proactively and regularly invest in the business. And the things you see on this page reflects some of our biggest projects, most of which are multi-year undertakings all are, I think, critical to the smooth long-term functioning of our bank into ensuring that we can continue to offer a consistently high customer -- high-level customer experience. Okay. So now I'll just close out my comments today with a recap of our performance in 2024. I'll also share just a few thoughts about how we're positioned in the current environment. You can see our financial metrics for the year, which were really very strong. Our net income came in at $526 million or a record $3.87 per share. Returns on assets and equity at 1.72% and 16.7%, respectively, ranked among the highest in our peer set. Our balance sheet, you can see on a year-end to year-end basis, was pretty much flat, but we did see margin expansion, which allowed for a pretty respectable net interest income growth. This expansion was, I think we would all say the result of our very low funding costs relative to other banks, and time was kind of on our side with the steady repricing of our asset book into a higher rate environment. So hence, the expansion on the net interest margin. And at the bottom of the page, you can see if you measured over the long term, our returns compare very favorably to other bank indices. You see here a little more detail on the earnings picture for the year, again, balanced growth on the top line with solid gains in both the fee income and the net interest income lines. Expenses were well controlled on the whole -- our bottom line rose 10% year-over-year and accounting for stock buybacks that translated into 12% EPS growth year-over-year. And I would just note the 5% growth in the dividend payout and also a nice rally in the stock price after I think we all remember was kind of an industry-wide reset in 2023. I would just like to point out the diversity of our revenues and I think the superior mix of fee income relative to our peers. You can see that our fee mix outstrips our peers by about 16 percentage points. We have particular strength in the card and the Wealth Management areas. The year-over-year growth of 7% that we saw on the prior page came from a variety of places, but most notably from our Wealth Management business. And over the long term, we are really focused on sustaining and growing this noninterest income. These diversified businesses offer some really attractive returns on our capital. They allow us to generate acceptable returns overall for the bank without having to reach for risk in places like our loan book or our asset liability mix. Speaking of loans, this theme of balance, I think, is also reflected in our loan portfolio, which I think you can see very well here on this page. We're diversified relative to peers. We have in general, less commercial real estate and less construction exposure that is offset by a higher mix of C&I loans and consumer loan balances. We're still in a very strong position relative to our peers on capital and on liquidity. We have very solid core funding, plenty of lending capacity and a very low loan-to-deposit ratio relative to the industry and peers. So you can see here the year-end numbers on this page. And then also just on credit, our performance remains strong, although, of course, the industry has taken very few losses in recent years. But at some point, and possibly sooner rather than later, we do think credit quality will really matter again. And we are underwriting, I think, with that correction in mind. This overall risk posture has served us well over time. In fact, we've tended to outperform in recessionary times. This is just looking at returns on assets over the past 24 years. You can see -- I'd just note the increased outperformance in the last couple of years. which is, I think, a reflection largely of our stable and our low-cost funding really valuable in a time with elevated interest rates. And then here's just a comparison versus peers on both returns and what I'd call safety. So looking at ROA, ROE our capital levels and our problem loans. So we're among the top 2 or 3 in all these categories for 2024. I have been talking about performance for 2024. We'd just note that last week, we did release earnings for the first quarter of this year. I think shareholders should be happy to see our continued steady performance. We came in at $0.98 of earnings per share, which is $0.10 higher than the same period in 2024. We saw a little bit of capital growth. You see that in our tangible common equity. But we did that while, of course, still paying our dividend and buying back about $55 million in shares during the quarter. And if you're interested, you can find a whole lot more detail on our investor website on the quarter. As I mentioned earlier, there is a lot of economic uncertainty on the horizon, and I mentioned the importance of liquidity and capital. And I think we're really in excellent shape in that regard. You can see we have a lot of borrowing capacity should we ever need it. We had about a little shy of $2.5 billion of extra cash on deposit at the Fed at the end of the quarter. We have very low levels of uninsured deposits, a low loan-to-deposit ratio. And again, all of our measures of capitalization look very strong. Of course, our performance in the short term is going to depend on the environment that we're operating in, but really, this is a long race that we're running. And it's important for me to say that your commerce team is focused on delivering value over the long term. this year marked the 57th consecutive year of dividend growth for the company, and we are not aware of another bank with that sort of track record. Again, focused on generating returns for our shareholders. I think you can see our track record remains very strong. We are optimistic about the future and our goal is really to constantly improve our franchise to innovate and to generate growth over time and to do that without taking on undue risk. And so I'll just close with this picture because as we sit here today with possible storm clouds on the horizon, I just wanted to note some of the reasons that investors like you choose to own a piece of our business. I mentioned clouds on the horizon. We seek to run what I'd call an all-weather business, 1 that is capable of delivering results throughout the economic cycle. This company has a diversified portfolio of business. We have a high-quality deposit franchise. I think the risk in our business is tightly managed. You can see that in our credit metrics, among other things. And at the same time, we carry ample capital to ensure against unanticipated adverse events. Now over time, I think this model has allowed us to invest in and to sustain our franchise, and it has generated steady returns for our shareholders. So I'd like to just conclude by thanking you, our shareholders, for the confidence that you place in our Commerce management team. We're focused on the future. We're very much grateful for the support that you give us. And so Mr. Chairman, that concludes my remarks this morning. We'd be delighted to respond to any questions if there are any.

Okay, John. Thank you. excellent presentation on some strong results. At this time, we'd like to invite any questions shareholders might have for the company or KPMG. [Operator Instructions] If we have any questions?

We have no questions.

Okay. Well, thank you very much for attending the meeting this morning. We will now adjourn the meeting, and thank you.

This concludes the meeting. You may now disconnect.