Commerce Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2023. Commerce Bancshares is a bank holding company operating through Commerce Bank, with Consumer, Commercial and Wealth segments.
Financial performance
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $248.5 million | $246.4 million in Q3 2022 (+0.9%) |
| Non-interest income | $142.9 million | $138.5 million in Q3 2022 (+3.2%) |
| Non-interest expense | $228.0 million | $212.9 million in Q3 2022 (+7.1%) |
| Net income attributable to Commerce Bancshares | $120.6 million; diluted EPS $0.96 | $122.8 million and $0.97 in Q3 2022 |
- For the first nine months, net income attributable to the company was $367.8 million (+3.1%); diluted EPS was $2.93 versus $2.81.
- Nine-month net interest income was $749.7 million (+9.0%); fully taxable-equivalent net interest margin was 3.16% versus 2.75%. Management attributed higher interest income on loans and Federal Reserve balances to higher rates and loan growth, partly offset by sharply higher deposit and borrowing costs.
- Q3 return on average assets was 1.49%, return on average equity 17.73%, and efficiency ratio 58.15% (versus 55.19% a year earlier). Nine-month efficiency ratio was 57.62% versus 57.48%.
- Q3 loan interest income rose substantially, but interest expense on deposits and borrowings increased $95.9 million year over year. Nine-month net charge-offs increased to $23.0 million from $13.4 million; the allowance for loan losses was $162.2 million, or 0.95% of loans.
Balance sheet, liquidity and capital
- Total assets were $31.4 billion at September 30, 2023, down from $31.9 billion at year-end 2022. Loans grew 5.1% to $17.1 billion; deposits declined 4.2% to $25.1 billion.
- Deposit mix shifted: non-interest-bearing deposits fell to $8.0 billion from $10.1 billion, while certificates of deposit increased to $3.0 billion from $994 million. Brokered deposits were $401.3 million, scheduled to mature before year-end. Uninsured deposits were $10.2 billion (40.6% of deposits), or $8.1 billion (32.3%) excluding affiliate and collateralized deposits.
- Borrowings totaled $3.25 billion, including $500 million in FHLB advances. Available liquidity sources included $12.2 billion in reported liquid assets and $6.6 billion in estimated additional FHLB/FRB advance capacity. Management stated liquidity was adequate.
- Available-for-sale debt securities had a $1.6 billion net unrealized loss; accumulated other comprehensive loss was $1.19 billion. The company reported no identified credit losses in the securities portfolio and said it did not intend or expect to be required to sell securities at a loss.
- Regulatory capital ratios remained above well-capitalized minimums: Tier 1 common 15.11%, total risk-based capital 15.90%, and Tier 1 leverage 10.87%. Nine-month operating cash flow was $367.7 million; cash, cash equivalents and restricted cash increased $1.31 billion.
Changes, outlook, risks and unusual items
- Management’s allowance model assumed a mild recession beginning in Q4 2023, with elevated inflation, higher rates and a weaker job market among cited concerns. The filing provides no earnings or revenue guidance.
- Credit costs and consumer losses increased: Q3 total annualized net charge-offs were 0.23% of average loans versus 0.12% a year earlier; credit-card charge-offs were 3.32%. Management considered the allowance adequate. Potential problem loans declined to $219.4 million from $259.7 million at year-end.
- Q3 securities gains of $4.3 million included $5.6 million of private-equity fair-value gains, partly offset by realized losses. Nine-month results also included private-equity gains, securities-sale losses, a $7.6 million goodwill addition from the L.J. Hart acquisition, and $2.1 million of Wealth-segment deconversion costs.
- Following banking-industry stress, the company used FHLB funding and added short-term brokered CDs. It identified deposit competition, funding costs, borrowing access and possible forced securities sales as risks. A proposed FDIC special assessment was estimated to cost about $14.9 million if finalized as proposed; the amount could change.
- Other disclosed risks include higher credit losses in a downturn, interest-rate and market-value changes, regulatory changes, cybersecurity threats and pending ordinary-course legal matters. The filing reports no material changes to previously disclosed risk factors during the quarter.
Important facts for investors to verify
- Subsequent deposit trends, brokered-CD maturities, uninsured deposit balances and use of wholesale funding.
- Net interest margin and deposit pricing as rates change, including the effectiveness and accounting impact of interest-rate hedges.
- Loan delinquencies, charge-offs and commercial real-estate exposures, particularly office, senior living and construction lending.
- Whether the FDIC special assessment is finalized and its actual cost, and whether securities unrealized losses could become realized.
- Execution and costs of the L.J. Hart acquisition and Wealth-platform transition, alongside expense growth and private-equity valuation gains.