Commerce Bancshares, Inc. — Q1 2024 Form 10-Q
Business context and reporting period. Commerce Bancshares is a bank holding company whose operations are primarily conducted through Commerce Bank, with Consumer, Commercial and Wealth segments. This unaudited filing covers the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Results for the quarter are not necessarily indicative of full-year performance.
Financial performance and condition
- Earnings: Net income attributable to Commerce Bancshares was $112.7 million, down 5.7% from $119.5 million a year earlier. Diluted EPS was $0.86 versus $0.91. Return on average assets was 1.48%; return on average equity was 15.39%.
- Revenue and margins: Net interest income was $249.0 million, down 1.0%. On a fully taxable-equivalent basis, net interest income was $251.3 million and net interest margin was 3.33%, compared with 3.26% a year earlier. Higher loan yields and balances and interest on Federal Reserve deposits partly offset materially higher deposit costs. Non-interest income rose 8.2% to $148.8 million, led by trust and deposit account fees. The efficiency ratio increased to 61.67% from 57.49%.
- Expenses and credit costs: Non-interest expense increased 9.6% to $245.7 million, including a $10.0 million litigation settlement expense, net of insurance, and higher FDIC insurance, compensation and technology costs. Total provision for credit losses was $4.8 million, versus $11.5 million in Q1 2023; this included a $6.9 million loan provision partly offset by a $2.2 million benefit for unfunded commitments.
- Loans and credit quality: Loans were $17.3 billion, up 0.5% from year-end. Net charge-offs were $8.9 million, or 0.21% of average loans, compared with $6.8 million and 0.17% a year earlier. Consumer credit card charge-offs rose to 4.60% from 3.15%. Nonperforming assets were $6.0 million (0.03% of loans), down from $7.6 million at year-end; however, potential problem loans increased 23.4% to $267.0 million. The allowance for loan losses was $160.5 million, or 0.93% of loans.
- Liquidity, funding and debt: Deposits were $24.4 billion, down 3.6% from year-end; non-interest-bearing deposits were $7.5 billion. The average loans-to-deposits ratio was 69.9%. Period-end federal funds purchased and repurchase agreements totaled $2.5 billion; there were no FHLB advances outstanding. Available stated future borrowing capacity at the FHLB and Federal Reserve was $6.6 billion. Cash, cash equivalents and restricted cash were $1.9 billion at quarter-end.
- Cash flow: Operating activities provided $135.5 million and investing activities provided $540.9 million; financing activities used $1.46 billion, primarily reflecting deposit outflows and lower short-term borrowings. Cash, cash equivalents and restricted cash decreased $786.6 million during the quarter.
- Capital and securities: Total equity was $3.0 billion. Regulatory capital ratios remained above well-capitalized minimums: Tier 1 common risk-based capital 15.35%, total risk-based capital 16.11%, and Tier 1 leverage 11.75%. Available-for-sale securities had a fair value of $9.1 billion and net unrealized losses of $1.2 billion, primarily attributed to interest rates; the company reported no credit-loss allowance on these securities.
Material changes and management commentary
- Compared with Q1 2023, loan interest income increased, but higher deposit interest expense more than offset much of that benefit. The average rate paid on total deposits rose 126 basis points, while the average yield on total interest-earning assets increased to 4.78% from 4.00%.
- Management’s Q1 credit-loss forecast reflected a strong labor market and positive GDP, with unemployment forecast at 3.9%–4.1% and real GDP growth at 1.5%–3.0% over the forecast period. The model assumed Federal Reserve rate cuts beginning in Q2 2024; management noted that inflation and labor-market developments could affect their timing and scale. This is an assumption in the credit model, not earnings guidance.
- The company reported no material changes to the risk factors in its 2023 Form 10-K. It identifies economic conditions, interest rates, deposit behavior, loan demand, regulation, competition and cybersecurity among relevant risks. Its interest-rate simulation showed net interest income declining 0.57% under a 100-basis-point rate decrease and 3.73% under a 300-basis-point decrease over 12 months, assuming a flat balance sheet.
- The company accrued $20.1 million for the FDIC special assessment at March 31. It also disclosed ordinary-course legal proceedings; some matters are too early to determine whether a probable, estimable loss exists.
- Subsequent events: On May 3, 2024, the company completed an exchange of Visa shares and recorded a $175.5 million fair-value gain based on Visa Class A’s closing price. This occurred after quarter-end and is not part of Q1 reported earnings. After the exchange, the company approved a planned sale of about $1.0 billion of low-yield securities, expected to produce an approximately $165 million loss, with proceeds intended to be reinvested mainly in securities yielding about 4.6%. Timing and realized results may vary with market conditions and other factors.
- The board increased the share-repurchase authorization to 5.0 million shares on April 17. The company repurchased 806,217 shares in Q1 and paid a quarterly dividend of $0.27 per share.
Important facts for investors to verify
- Whether deposit levels, funding costs and net interest margin stabilize, and how actual rate movements compare with management’s modeled scenarios.
- Whether rising consumer charge-offs and the increase in potential problem loans lead to higher provisions or further credit deterioration.
- The timing, realized loss and reinvestment yield from the planned $1.0 billion securities repositioning, and the effect on future net interest income and accumulated other comprehensive income.
- How the Visa exchange gain, transfer restrictions and makewhole agreement are reflected in subsequent-period results and valuations.
- Whether deposit outflows, pledged assets and contingent commitments—including $14.8 billion of loan commitments—affect liquidity or capital needs.