8-K: Commerce Bancshares Reports Mixed First Quarter Results Amidst Interest Rate Pressures

Commerce Bancshares reported first quarter earnings of $0.86 per share, a slight decrease from the previous year, while experiencing growth in net interest margin and non-interest income.

Summary

• Commerce Bancshares announced first quarter 2024 earnings of $0.86 per share, compared to $0.91 per share in the same quarter last year and $0.84 per share in the fourth quarter of 2023.
• Net income for the first quarter of 2024 was $112.7 million, down from $119.5 million in the first quarter of 2023 but up from $109.2 million in the prior quarter.
• Net interest income was $249.0 million, a slight increase of $578 thousand over the previous quarter.
• The net yield on interest earning assets increased 16 basis points to 3.33%.
• Non-interest income totaled $148.8 million, an increase of $11.2 million compared to the same quarter last year.
• Non-interest expense totaled $245.7 million, which included a $10.0 million litigation settlement expense and a $4.0 million accrual adjustment to the FDIC's insurance special assessment.
• Average loan balances were $17.1 billion, flat compared to the prior quarter.
• Total average deposits decreased by $759.5 million, or 3.0%, compared to the prior quarter.
• The return on average assets was 1.48%, the return on average equity was 15.39%, and the efficiency ratio was 61.7%.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the company's strong capital position, credit quality, and growth in non-interest income. However, the decrease in earnings per share and net income, along with the decline in deposits and increase in unrealized losses, temper the overall outlook.

Positives

• Net interest income saw a slight increase of $578 thousand compared to the previous quarter.
• The net yield on interest earning assets increased by 16 basis points to 3.33%.
• Non-interest income grew by $11.2 million compared to the same quarter last year.
• Trust fees increased by $5.8 million, or 12.7%, compared to the same period last year.
• The company's credit performance remains strong, with non-accrual loans at 0.03% of total loans.
• The company's Tier 1 common risk-based capital ratio is 15.25%, which is the 4th highest among the top 50 U.S. banks based on asset size.
• The company has a diversified business model and a strong deposit franchise.

Negatives

• Earnings per share decreased to $0.86 from $0.91 in the same quarter last year.
• Net income decreased to $112.7 million from $119.5 million in the first quarter of 2023.
• Total average deposits decreased by $759.5 million, or 3.0%, compared to the prior quarter.
• Non-interest expense increased by $21.6 million compared to the same quarter last year, including a $10.0 million litigation settlement and a $4.0 million FDIC special assessment.
• The unrealized loss on available for sale debt securities increased by $27.2 million to $1.2 billion.
• Total assets decreased by $1.3 billion, or 4.2%, compared to the prior quarter.

Risks

• Elevated interest rates continue to put downward pressure on bank balance sheets.
• The company experienced a decrease in total average deposits, which could impact funding.
• The unrealized loss on available for sale debt securities increased, which could affect capital.
• The company incurred a $10.0 million litigation settlement expense and a $4.0 million FDIC special assessment accrual, impacting profitability.
• The company is exposed to interest rate risk, with a significant portion of loans being variable rate.

Future Outlook

The company expects to record a significant gain in the second quarter of 2024 if the Visa Class B-1 share exchange is accepted and completed. The company also expects approximately $1.6 billion in maturities and paydowns of its available for sale investment portfolio over the next 12 months.

Management Comments

• Commerce delivered a strong financial performance for the first quarter, said John Kemper, President and Chief Executive Officer.
• Our results are a reflection of fundamental strength and a diversified business model, and evidence of our ability to perform well through economic cycles.
• Although interest rates continue to be elevated and put downward pressure on bank balance sheets, Commerce's net interest income grew slightly over the previous quarter and our net interest margin expanded 16 basis points.
• Interest-bearing deposit costs increased just four basis points over the previous quarter, a product of our high-quality deposit franchise.
• Our liquidity and capital levels remain robust, and credit performance remains excellent, with non-accrual loans at .03% of total loans, down from .05% from the first quarter of last year.

Industry Context

The results reflect the challenges faced by regional banks in a high interest rate environment, with pressure on net interest income and deposit balances. However, Commerce Bancshares' diversified business model and strong credit quality position it well compared to some peers. The company's focus on wealth management and national payments businesses also provides a buffer against interest rate volatility.

Comparison to Industry Standards

• Commerce Bancshares' Tier 1 common risk-based capital ratio of 15.25% is the 4th highest among the top 50 U.S. banks based on asset size, indicating a strong capital position compared to peers.
• The company's return on average common equity (ROACE) of 15.39% is also among the top 4 for the top 50 U.S. banks based on asset size, demonstrating strong profitability.
• The company's baseline credit assessment is two ratings above the U.S. banking industry median rating, suggesting a higher credit quality than many of its competitors.
• The company's net loan charge-offs of 0.21% are relatively low compared to the peer average of 0.38%, indicating strong credit risk management.
• The company's non-accrual loans to total loans ratio of 0.03% is also lower than the peer average of 0.05%, further highlighting its strong credit quality.

Legal Proceedings

• The company incurred a $10.0 million litigation settlement expense during the quarter.

Stakeholder Impact

• Shareholders may be concerned about the decrease in earnings per share and net income.
• Employees may be affected by changes in salaries and benefits.
• Customers may be impacted by changes in deposit rates and fees.
• Creditors may be concerned about the decrease in total assets and deposits.

Next Steps

• The company is awaiting notification of acceptance of its tender of Visa Class B-1 shares and the closing of the exchange offer.
• The company expects approximately $1.6 billion in maturities and paydowns of its available for sale investment portfolio over the next 12 months.

Key Dates

Keywords

earnings, net interest income, non-interest income, deposits, loans, interest rates, credit quality, financial results, bank, capital