Business context and reporting period
Commerce Bancshares, Inc. is a bank holding company operating primarily through Commerce Bank, with Consumer, Commercial and Wealth segments. This unaudited Form 10-Q covers the three months ended March 31, 2023; comparisons are mainly with Q1 2022, and balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $251.6 | $208.8, Q1 2022 (+20.5%) |
| Net interest margin, FTE | 3.26% | 2.45%, Q1 2022 |
| Non-interest income | $137.6 | $131.8, Q1 2022 (+4.4%) |
| Non-interest expense | $224.1 | $205.6, Q1 2022 (+9.0%) |
| Net income attributable to Commerce Bancshares | $119.5; diluted EPS $0.95 | $118.2; diluted EPS $0.92, Q1 2022 |
| Return on average assets / equity | 1.54% / 18.75% | 1.33% / 14.41%, Q1 2022 |
| Efficiency ratio | 57.49% | 60.29%, Q1 2022 |
| Loans / deposits | $16.5bn / $24.7bn | $16.3bn / $26.2bn, December 31, 2022 |
| Cash and cash equivalents (cash-flow measure) | $1.72bn | $0.90bn at start of year |
Net interest income growth reflected higher loan yields and average loan balances, partly offset by sharply higher deposit and borrowing costs. Average loans rose 7.8% year over year; average interest-bearing liability cost increased to 1.20% from 0.06%. Net income rose only 1.1%, as credit provisioning and operating expenses increased. Bank-card fees grew 11.0%, while trust fees fell 5.2% and loan fees and sales fell 38.9%.
Q1 operating cash flow was $116.1 million; investing activities provided $888.2 million, largely from securities sales, maturities and paydowns; financing activities used $182.0 million. Total assets were $32.0bn. Deposits declined $1.50bn from year-end, while total borrowings rose to $4.29bn from $2.85bn, including $1.50bn of FHLB advances. The company reported $4.38bn of available future FHLB and Federal Reserve advances, subject to collateral and facility terms.
Available-for-sale securities had a $1.31bn net unrealized loss at quarter-end, down from $1.50bn at year-end; the portfolio’s fair value was $11.23bn. The company reported no held-to-maturity securities and said it did not intend or expect to be required to sell securities at a loss. The allowance for loan losses was $159.3m, or 0.96% of loans, and the liability for unfunded commitments was $28.6m. Total annualized net charge-offs were 0.17% of average loans, versus 0.12% a year earlier; consumer credit-card net charge-offs were 3.15%, versus 2.53%.
Regulatory capital ratios remained above well-capitalized thresholds: Tier 1 common risk-based capital 14.47%, total risk-based capital 15.26%, and Tier 1 leverage 10.61%. The quarterly common dividend was $0.27 per share. The filing reports a 7.92% tangible common equity-to-tangible assets ratio, a non-GAAP measure.
Material changes versus prior periods
- Higher market rates lifted loan income but also increased deposit and borrowing expense; net interest margin improved year over year.
- Deposits fell $1.50bn from December 31, 2022; the company increased borrowings by about $1.4bn during the quarter amid banking-sector disruption and deposit uncertainty.
- Q1 provision for credit losses was $11.5m overall, compared with a $9.9m benefit in Q1 2022. Loan-loss allowance increased from $150.1m at year-end, reflecting a less optimistic economic forecast and higher charge-offs.
- Non-interest expense increased 9.0%, including higher salaries, FDIC insurance, processing costs and other expenses. Securities results shifted from $7.2m net gains in Q1 2022 to a $0.3m net loss in Q1 2023.
- Accumulated other comprehensive loss improved to $940.5m from $1.09bn at year-end, principally due to gains on available-for-sale securities and cash-flow hedges.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. The credit-loss forecast assumed a mild recession beginning in Q3 2023, with unemployment and economic growth weakening; management cautioned that actual results may differ and Q1 results are not necessarily indicative of the full year.
- Management cited the 2023 bank failures, reduced confidence in regional banks, deposit competition and rising rates as risks to deposits, funding costs, liquidity and share price. It warned that selling securities before maturity could result in significant realized losses.
- At March 31, uninsured deposits were $9.8bn, or 39.7% of total deposits; excluding affiliate and collateralized deposits, they were $7.8bn, or 31.6%. Core deposits were $23.1bn, or 93.6% of deposits.
- Other risks include interest-rate sensitivity, credit deterioration in a recession, commercial real estate exposure, regulatory changes, cybersecurity and access to short-term funding. The filing reported no material changes to the risk factors in the 2022 Form 10-K.
- Q1 included $3.1m of realized losses on sales of available-for-sale securities, largely offset by private-equity gains. The company also reported a $25.9m purchase of an interest-rate floor; its floors hedge exposure to declining rates on certain floating-rate commercial loans.
- Loan commitments totaled $14.2bn, including $5.2bn in unused approved credit-card lines. Standby letters of credit totaled $625.9m gross; legal proceedings were described as arising in the ordinary course, with no clear quantified exposure provided.
Important facts for investors to verify
- Deposit trends, uninsured-deposit composition, and the cost and availability of borrowings as funding conditions evolve.
- Whether the $1.31bn securities unrealized loss, collateral needs and any future securities sales affect liquidity or reported capital.
- Credit performance—especially consumer credit cards, overdrafts, commercial real estate and loans downgraded to substandard—and the adequacy of loss reserves under changing economic forecasts.
- Whether loan yields continue to outpace rising deposit and borrowing costs, and whether expense growth moderates.
- Regulatory capital and liquidity disclosures, including collateral availability and the company’s ability to maintain dividends and share repurchases.