Commerce Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Figures are unaudited; dollar amounts are in millions unless otherwise noted. The company conducts most operations through Commerce Bank.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $246.4 | $214.0 | $687.5 | $627.8 |
| Net interest margin, FTE | 3.01% | 2.58% | 2.75% | 2.63% |
| Non-interest income | $138.5 | $137.5 | $409.7 | $412.7 |
| Investment securities gains, net | $3.4 | $13.1 | $11.6 | $39.8 |
| Provision for credit losses | $15.3 | $(7.4) benefit | $12.6 | $(59.3) benefit |
| Non-interest expense | $212.9 | $211.6 | $632.0 | $602.3 |
| Net income attributable to Commerce Bancshares | $122.8 | $122.6 | $356.8 | $415.9 |
| Diluted earnings per share | $1.02 | $0.99 | $2.95 | $3.37 |
- Q3 return on average assets was 1.48%, return on average equity 17.84%, and efficiency ratio 55.19%. Nine-month figures were 1.39%, 16.08%, and 57.48%, respectively.
- At September 30, total assets were $32.6 billion, loans $15.9 billion, deposits $27.5 billion, and borrowings $2.3 billion. Loans increased $722.6 million (4.8%) and deposits fell $2.3 billion compared with year-end 2021.
- Cash, cash equivalents and restricted cash were $1.0 billion at September 30, down $3.3 billion over the first nine months. Operating activities provided $469.8 million; investing activities used $247.2 million; financing activities used $3.5 billion.
- Available-for-sale debt securities had a $12.6 billion fair value and $1.5 billion of net unrealized losses. The losses were primarily attributed to higher interest rates; management reported no identified credit losses and did not expect to be required to sell the securities before recovery.
- Stockholders’ equity was $2.4 billion, down from $3.4 billion at year-end 2021, including a $1.2 billion decline in accumulated other comprehensive income. Tangible common equity to tangible assets was 6.80%, versus 9.71% a year earlier.
- Regulatory capital ratios remained above well-capitalized minimums: Tier 1 common 13.97%, total risk-based capital 14.69%, and Tier 1 leverage 9.87% at September 30.
Changes versus comparable periods
- Q3 net income was nearly flat year over year, while diluted EPS rose 3.0%. Higher net interest income was largely offset by a higher credit-loss provision and lower securities gains. The company cited share repurchases as a factor in per-share performance.
- For the first nine months, net income declined 14.2% and diluted EPS 12.5%. Net interest income rose 9.5%, but this was outweighed by the shift from a large prior-year credit-loss recovery to provision expense, lower securities gains, and 4.9% higher non-interest expense.
- Q3 net interest income growth reflected higher loan and securities income, partly offset by higher deposit and borrowing costs. Net yield on earning assets, FTE, rose to 3.01% from 2.58%.
- Q3 non-interest income increased 0.7%; lower mortgage banking fees and trust fees were offset by higher bank card fees and other income. Nine-month non-interest income declined 0.7%, including a 56.8% fall in loan fees and sales, mainly from lower mortgage banking revenue.
- Non-performing assets were $7.5 million, or 0.02% of assets, versus $9.3 million at year-end 2021. Potential problem loans increased to $292.5 million from $278.7 million.
Outlook, risks and unusual items
- Credit outlook: Management’s allowance forecast assumed a mild recession in 2023 amid high inflation, rising rates, supply-chain difficulties, and a weaker job market. The allowance for loan losses was $143.4 million, or 0.90% of loans; the liability for unfunded lending commitments was $30.0 million. Management considered these reserves adequate, but emphasized forecast uncertainty.
- Interest-rate and liquidity risks: The company’s rate simulations showed modest net-interest-income sensitivity to rising rates in the flat-balance-sheet scenario, but potential declines under rising-rate scenarios that assumed deposit attrition. Management noted deposit behavior is uncertain. Core deposits were 96.4% of deposits; available liquidity also included $12.6 billion of available-for-sale securities, $1.3 billion in resale agreements, and $642.9 million at the Federal Reserve.
- Funding and commitments: Loan commitments totaled $13.9 billion, including $5.1 billion of unused approved credit-card lines. Standby and commercial letters of credit were $516.2 million and $1.2 billion, respectively. These are contingent commitments and do not necessarily represent future cash outflows.
- Other notable items: Q3 securities gains included $14.1 million of private-equity fair-value gains, partly offset by a $10.7 million loss on a securities sale. The nine-month period included $2.2 million of life-insurance death-benefit income and $5.4 million in special employee bonuses. The company repurchased 2.35 million shares during the first nine months and paid a Q3 dividend of $0.265 per share.
- The company disclosed ordinary-course legal proceedings; some matters were too early to determine whether a probable, estimable loss existed. It reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
- No specific earnings or financial guidance was provided in the supplied filing text. Management stated that results for the nine months should not be viewed as necessarily indicative of the full year.
Important facts for investors to verify
- Whether deposit outflows continue and how the mix and cost of deposits respond to higher interest rates.
- How the $1.5 billion unrealized securities loss and reduced tangible common equity ratio affect capital, liquidity, and flexibility if securities must be sold.
- Whether the mild-recession forecast, credit-loss reserves, potential problem loans, and consumer charge-offs develop as management expects.
- Whether higher net interest income can persist as deposit and borrowing costs rise, including under deposit-attrition scenarios.
- The sustainability of private-equity fair-value gains, mortgage banking activity, and expense growth; also monitor the company’s share repurchases and dividend against capital needs.