merce Bancshares(CBSH) - 2023 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the company's financial statements, including balance sheets, income statements, comprehensive income, equity changes, and cash flows, along with detailed notes Item 1. Financial Statements This section presents the company's financial statements, including balance sheets, income statements, comprehensive income, equity changes, and cash flows, along with detailed notes Consolidated Balance Sheets This section presents the company's financial position at September 30, 2023, and December 31, 2022, showing changes in assets, liabilities, and stockholders' equity | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | Change (vs. Dec 31, 2022) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :------------------------ | | Total Assets | $31,376,692 | $31,875,931 | $(499,239) | | Total Loans (Gross) | $17,129,326 | $16,303,131 | $826,195 | | Allowance for Credit Losses on Loans | $(162,244) | $(150,136) | $(12,108) | | Net Loans | $16,967,082 | $16,152,995 | $814,087 | | Available for Sale Debt Securities | $9,860,828 | $12,238,316 | $(2,377,488) | | Interest Earning Deposits with Banks | $1,847,641 | $389,140 | $1,458,501 | | Total Deposits | $25,090,457 | $26,187,440 | $(1,096,983) | | Non-interest Bearing Deposits | $7,961,402 | $10,066,356 | $(2,104,954) | | Certificates of Deposit (<$100k) | $1,210,169 | $387,336 | $822,833 | | Certificates of Deposit (>$100k) | $1,764,611 | $606,767 | $1,157,844 | | Total Liabilities | $28,777,426 | $29,394,354 | $(616,928) | | Total Equity | $2,599,266 | $2,481,577 | $117,689 | Consolidated Statements of Income This section details the company's income and expenses for the three and nine months ended September 30, 2023 and 2022, showing net income changes year-over-year | Metric (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest income | $361,162 | $262,666 | $1,018,682 | $712,602 | | Total interest expense | $112,615 | $16,293 | $268,974 | $25,058 | | Net interest income | $248,547 | $246,373 | $749,708 | $687,544 | | Provision for credit losses | $11,645 | $15,290 | $29,572 | $12,594 | | Total non-interest income | $142,949 | $138,514 | $428,166 | $409,710 | | Investment securities gains (losses), net | $4,298 | $3,410 | $7,384 | $11,602 | | Total non-interest expense | $228,010 | $212,884 | $679,728 | $632,037 | | Net income attributable to Commerce Bancshares, Inc.| $120,596 | $122,823 | $367,837 | $356,771 | | Net income per common share — basic | $0.96 | $0.97 | $2.94 | $2.81 | | Net income per common share — diluted | $0.96 | $0.97 | $2.93 | $2.81 | Consolidated Statements of Comprehensive Income This section outlines the comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022, highlighting unrealized gains and losses | Metric (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $122,700 | $126,187 | $373,716 | $366,366 | | Net unrealized gains (losses) on available for sale debt securities | $(133,024) | $(345,565) | $(72,440) | $(1,181,031) | | Unrealized gains (losses) on cash flow hedge derivatives | $(24,414) | $(7,187) | $(34,968) | $(16,340) | | Other comprehensive income (loss) | $(157,239) | $(352,450) | $(106,670) | $(1,196,424) | | Comprehensive income (loss) | $(34,539) | $(226,263) | $267,046 | $(830,058) | Consolidated Statements of Changes in Equity This section details the changes in stockholders' equity for the three and nine months ended September 30, 2023 and 2022, reflecting net income, OCI, and dividends | Metric (In thousands) | Sep 30, 2023 (9 Months) | Sep 30, 2022 (9 Months) | | :---------------------------------------------------------- | :---------------------- | :---------------------- | | Balance December 31, 2022 (2021) | $2,481,577 | $3,448,324 | | Net income | $373,716 | $366,366 | | Other comprehensive income (loss) | $(106,670) | $(1,196,424) | | Purchases of treasury stock | $(56,541) | $(163,321) | | Cash dividends paid on common stock | $(101,160) | $(95,818) | | Balance September 30, 2023 (2022) | $2,599,266 | $2,371,107 | Consolidated Statements of Cash Flows This section presents the cash flow activities for the nine months ended September 30, 2023 and 2022, showing a significant increase in cash and cash equivalents in 2023 | Metric (In thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $367,745 | $469,785 | | Net cash provided by (used in) investing activities | $1,718,369 | $(247,162) | | Net cash provided by (used in) financing activities | $(775,399) | $(3,510,501) | | Increase (decrease) in cash, cash equivalents and restricted cash | $1,310,715 | $(3,287,878) | | Cash, cash equivalents and restricted cash at September 30 | $2,208,516 | $1,009,076 | Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, explaining accounting policies and specific financial line items Note 1. Principles of Consolidation and Presentation This note outlines the accounting principles used for the consolidated financial statements, including the adoption of ASU 2022-02 - The Company adopted ASU 2022-02 on January 1, 2023, eliminating troubled debt restructuring (TDR) recognition and measurement guidance, and enhancing disclosures for loan modifications to financially distressed borrowers[71][73][99][100] - Loans previously classified as TDRs will continue under the old method until paid off or modified[71][73][99][100] Note 2. Loans and Allowance for Credit Losses This note provides detailed information on the Company's loan portfolio, including classifications, credit quality, and allowance for credit losses | Loan Category (In thousands) | Sep 30, 2023 | Dec 31, 2022 | Change (vs. Dec 31, 2022) | | :---------------------------------- | :----------- | :----------- | :------------------------ | | Business | $5,908,330 | $5,661,725 | $246,605 | | Real estate – construction and land | $1,539,566 | $1,361,095 | $178,471 | | Real estate – business | $3,647,168 | $3,406,981 | $240,187 | | Real estate – personal | $3,024,639 | $2,918,078 | $106,561 | | Consumer | $2,125,804 | $2,059,088 | $66,716 | | Revolving home equity | $305,237 | $297,207 | $8,030 | | Consumer credit card | $574,829 | $584,000 | $(9,171) | | Overdrafts | $3,753 | $14,957 | $(11,204) | | Total loans | $17,129,326 | $16,303,131 | $826,195 | | Metric (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------- | :----------- | :----------- | | Allowance for Credit Losses on Loans | $162,244 | $150,136 | | Liability for Unfunded Lending Commitments | $27,537 | $33,120 | | Total Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments | $189,781 | $183,256 | - The Company had commitments of $9.1 million at September 30, 2023, to lend additional funds to borrowers experiencing financial difficulty, where loan terms were modified (principal forgiveness, interest rate reduction, payment delay, or term extension)[5] | Risk Rating (Commercial Loans) | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | | :----------------------------- | :-------------------------- | :-------------------------- | | Pass | $10,757,845 | $10,131,271 | | Special mention | $111,974 | $32,437 | | Substandard | $218,567 | $259,153 | | Non-accrual | $6,678 | $6,940 | | Total Commercial loans | $11,095,064 | $10,429,801 | | FICO Score (Personal Banking Loans) | Sep 30, 2023 (%) | Dec 31, 2022 (%) | | :---------------------------------- | :--------------- | :--------------- | | Under 600 | 1.8 - 4.4 | 1.4 - 3.4 | | 600 - 659 | 2.3 - 12.1 | 2.2 - 11.4 | | 660 - 719 | 8.3 - 29.5 | 8.1 - 30.8 | | 720 - 779 | 22.2 - 27.6 | 23.7 - 27.1 | | 780 and over | 53.3 - 65.4 | 52.4 - 64.6 | Note 3. Investment Securities This note details the Company's investment securities portfolio, highlighting a significant decrease in fair value due to rising interest rates | Investment Security Type (In thousands) | Sep 30, 2023 | Dec 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------------------------- | :----------- | :----------- | :------------------------ | | Available for sale debt securities | $9,860,828 | $12,238,316 | $(2,377,488) | | Trading debt securities | $35,564 | $43,523 | $(7,959) | | Equity securities (Readily determinable fair value) | $5,453 | $6,210 | $(757) | | Equity securities (No readily determinable fair value) | $6,759 | $6,094 | $665 | | Federal Reserve Bank stock | $35,070 | $34,795 | $275 | | Federal Home Loan Bank stock | $30,400 | $10,678 | $19,722 | | Private equity investments | $165,322 | $178,127 | $(12,805) | | Total Investment Securities | $10,139,396 | $12,519,177 | $(2,379,781) | - The fair value of available-for-sale debt securities decreased by $2.38 billion from December 31, 2022, to September 30, 2023, primarily due to rising interest rates, resulting in a total unrealized loss of $1.6 billion at September 30, 2023[146][182] - No credit losses were identified on available-for-sale debt securities, and the Company does not intend to sell these securities at a loss[123][124] Note 4. Goodwill and Other Intangible Assets This note details the Company's goodwill and other intangible assets, including core deposit premiums and mortgage servicing rights | Intangible Asset (In thousands) | Sep 30, 2023 (Net Amount) | Dec 31, 2022 (Net Amount) | | :------------------------------ | :------------------------ | :------------------------ | | Core deposit premium | $511 | $705 | | Mortgage servicing rights | $10,321 | $10,929 | | Total Amortizable Intangible Assets | $10,832 | $11,634 | - During the first quarter of 2023, $25.7 million of fully amortized core deposit intangible assets were written off[222] - The acquisition of L.J. Hart & Company in Q2 2023 resulted in an increase of $7.6 million in goodwill[222] | Goodwill Allocation (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Consumer segment | $70,721 | $70,721 | | Commercial segment | $75,072 | $67,454 | | Wealth segment | $746 | $746 | | Total goodwill | $146,539 | $138,921 | Note 5. Guarantees This note describes the Company's financial guarantees, primarily standby letters of credit and credit risk participation agreements - The Company issues financial guarantees in the form of standby letters of credit, with a maximum potential future payment of $594.2 million at September 30, 2023, and a net liability of $3.4 million[191] - The Company also enters into credit risk participation agreements (RPAs) as a guarantor, with a fair value of $44 thousand and a notional amount of underlying swaps of $446.2 million at September 30, 2023[225] Note 6. Leases This note outlines the Company's lease activities, including direct financing, sales-type, and operating leases, and summarizes lease income | Lease Income (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Direct financing and sales-type leases | $8,160 | $5,477 | $22,456 | $15,838 | | Operating leases | $3,399 | $2,175 | $9,215 | $6,517 | | Total lease income | $11,559 | $7,652 | $31,671 | $22,355 | Note 7. Pension This note provides details on the Company's defined benefit pension plan, which has been frozen since January 1, 2011, and its net periodic pension cost - All benefits under the Company's defined benefit pension plan have been frozen since January 1, 2011, and no funding contributions were made to the plan during the first nine months of 2023[200] | Net Periodic Pension Cost (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Service cost | $120 | $128 | $352 | $391 | | Interest cost on projected benefit obligation | $1,146 | $713 | $3,461 | $2,043 | | Expected return on plan assets | $(1,035) | $(1,135) | $(3,037) | $(3,386) | | Amortization of prior service cost | $(68) | $(68) | $(203) | $(203) | | Amortization of unrecognized net loss | $332 | $470 | $1,186 | $1,465 | | Net periodic pension cost | $495 | $108 | $1,759 | $310 | Note 8. Common Stock This note provides a summary of basic and diluted income per common share, weighted average shares outstanding, and authorized common stock changes | Metric (In thousands, except per share data) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic income per common share | $0.96 | $0.97 | $2.94 | $2.81 | | Diluted income per common share | $0.96 | $0.97 | $2.93 | $2.81 | | Weighted average common shares outstanding | 123,718 | 124,840 | 123,868 | 125,600 | | Weighted average diluted common shares outstanding | 123,818 | 125,117 | 124,026 | 125,888 | - Shareholders approved an increase in authorized common stock from 140,000,000 to 190,000,000 shares at the Annual Meeting on April 19, 2023[230] Note 9. Accumulated Other Comprehensive Income This note details the components of accumulated other comprehensive income (AOCI), including unrealized gains/losses on securities and reclassifications | AOCI Component (In thousands) | Balance Jan 1, 2023 | Balance Sep 30, 2023 | | :---------------------------- | :------------------ | :------------------- | | Unrealized Gains (Losses) on Securities | $(1,124,915) | $(1,197,355) | | Pension Loss | $(17,186) | $(16,448) | | Unrealized Gains (Losses) on Cash Flow Hedge Derivatives | $55,237 | $20,269 | | Total AOCI (Loss) | $(1,086,864) | $(1,193,534) | - Effective January 1, 2023, residential mortgage loans previously in the "Other/Elimination" column were reclassified into the Consumer segment, with prior periods restated[232] Note 10. Segments This note provides selected financial information by the Company's three operating segments: Consumer, Commercial, and Wealth, and reconciliation to consolidated totals - The Company operates through three segments: Consumer (consumer loans/deposits, debit/credit cards), Commercial (corporate lending, leasing, international services, business/governmental deposits, cash management, capital markets), and Wealth (trust/estate planning, investment management, brokerage, private banking)[208][232] | Segment (In thousands) | Income before income taxes (9 Months Ended Sep 30, 2023) | Income before income taxes (9 Months Ended Sep 30, 2022) | Change (%) | | :--------------------- | :------------------------------------------------------- | :------------------------------------------------------- | :--------- | | Consumer | $116,857 | $108,615 | 7.6% | | Commercial | $245,814 | $227,981 | 7.8% | | Wealth | $97,999 | $108,817 | (9.9%) | | Consolidated Totals | $475,958 | $464,225 | 2.5% | Note 11. Derivative Instruments This note details the Company's derivative instruments, including interest rate swaps, floors, caps, and foreign exchange contracts, with their notional amounts and fair values | Derivative Instrument (In thousands) | Notional Amount (Sep 30, 2023) | Fair Value (Asset, Sep 30, 2023) | Fair Value (Liability, Sep 30, 2023) | | :----------------------------------- | :----------------------------- | :------------------------------- | :----------------------------------- | | Interest rate swaps | $2,199,242 | $56,635 | $(56,635) | | Interest rate floors | $2,000,000 | $53,289 | $0 | | Interest rate caps | $172,784 | $1,752 | $(1,752) | | Credit risk participation agreements | $613,822 | $11 | $(44) | | Foreign exchange contracts | $38,234 | $449 | $(287) | | Mortgage loan commitments | $1,834 | $35 | $0 | | Forward TBA contracts | $2,000 | $11 | $0 | | Total notional amount | $5,027,916 | $112,182 | $(58,718) | - The Company held four interest rate floors with a combined notional value of $2.0 billion to hedge against declining interest rates on floating-rate commercial loans, which qualified as cash flow hedges with changes in fair value recorded in AOCI[215][269] | Gain or (Loss) Recognized in Income (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Interest rate swaps | $365 | $88 | $2,861 | $1,770 | | Mortgage loan commitments | $(23) | $(230) | $35 | $(764) | | Forward TBA contracts | $63 | $117 | $113 | $1,783 | | Total | $673 | $105 | $3,232 | $2,839 | Note 12. Resale and Repurchase Agreements This note describes the Company's resale and repurchase agreements, treated as secured lending and collateralized borrowing transactions, detailing amounts and collateral - Resale and repurchase agreements are accounted for as secured lending and collateralized borrowing, not true sales/purchases of underlying securities[277] | Agreement Type (In thousands) | Gross Amount Recognized (Sep 30, 2023) | Net Amounts Presented in the Balance Sheet (Sep 30, 2023) | Gross Amount Recognized (Dec 31, 2022) | Net Amounts Presented in the Balance Sheet (Dec 31, 2022) | | :---------------------------- | :------------------------------------- | :-------------------------------------------------------- | :------------------------------------- | :-------------------------------------------------------- | | Total resale agreements | $650,000 | $450,000 | $1,025,000 | $825,000 | | Total repurchase agreements | $2,438,826 | $2,238,826 | $2,881,874 | $2,681,874 | | Repurchase Agreements Secured By (In thousands) | Sep 30, 2023 (Total) | Dec 31, 2022 (Total) | | :---------------------------------------------- | :------------------- | :------------------- | | U.S. government and federal agency obligations | $155,464 | $527,441 | | Agency mortgage-backed securities | $1,666,319 | $2,018,558 | | Non-agency mortgage-backed securities | $9,100 | $40,950 | | Asset-backed securities | $572,135 | $293,001 | | Other debt securities | $35,808 | $1,924 | | Total repurchase agreements, gross amount recognized | $2,438,826 | $2,881,874 | Note 13. Stock-Based Compensation This note outlines the Company's stock-based compensation, including nonvested restricted stock and stock appreciation rights, summarizing activity for 2023 - Stock-based compensation expense was $4.3 million for the three months ended September 30, 2023, and $12.6 million for the nine months ended September 30, 2023[282] | Nonvested Share Awards Activity | Shares (Jan 1, 2023) | Shares (Sep 30, 2023) | | :------------------------------ | :------------------- | :-------------------- | | Nonvested at beginning of period| 1,148,873 | N/A | | Granted | 311,275 | N/A | | Vested | (315,761) | N/A | | Forfeited | (25,539) | N/A | | Nonvested at end of period | N/A | 1,118,848 | | SAR Activity (9 Months Ended Sep 30, 2023) | Rights | Weighted Average Exercise Price | | :----------------------------------------- | :-------- | :------------------------------ | | Outstanding at January 1, 2023 | 948,727 | $46.82 | | Granted | 89,829 | $65.64 | | Forfeited | (4,337) | $63.62 | | Expired | (5,781) | $52.13 | | Exercised | (49,866) | $26.83 | | Outstanding at September 30, 2023 | 978,572 | $49.46 | Note 14. Revenue from Contracts with Customers This note disaggregates revenue from contracts with customers by major product line, emphasizing non-interest income contributions from bank card and trust fees - Approximately 64% of the Company's total revenue is net interest income, which is not within the scope of ASC 606[285] | Revenue Category (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Bank card transaction fees | $46,899 | $45,638 | $143,278 | $131,556 | | Trust fees | $49,207 | $45,406 | $141,800 | $140,009 | | Deposit account charges and other fees | $23,090 | $24,521 | $67,475 | $72,392 | | Consumer brokerage services | $3,820 | $5,085 | $13,582 | $14,599 | | Other non-interest income | $11,912 | $9,360 | $29,737 | $24,605 | | Total non-interest income from contracts with customers | $134,928 | $130,010 | $395,872 | $383,161 | Note 15. Fair Value Measurements This note explains the Company's fair value measurement methodologies, categorizing assets and liabilities into a three-level hierarchy based on input observability - Fair value measurements are categorized into Level 1 (quoted prices in active markets for identical assets), Level 2 (observable inputs for similar assets/liabilities), and Level 3 (unobservable and significant inputs)[261][321] | Asset (In thousands) | Total Fair Value (Sep 30, 2023) | Level 1 (Sep 30, 2023) | Level 2 (Sep 30, 2023) | Level 3 (Sep 30, 2023) | | :------------------- | :------------------------------ | :--------------------- | :--------------------- | :--------------------- | | Available for sale debt securities | $9,860,828 | $947,976 | $8,912,719 | $938 | | Trading debt securities | $35,564 | $0 | $35,564 | $0 | | Equity securities | $5,453 | $5,453 | $0 | $0 | | Private equity investments | $165,322 | $0 | $0 | $165,322 | | Derivatives | $112,182 | $0 | $112,136 | $46 | | Total assets measured at fair value | $10,198,574 | $972,288 | $9,059,980 | $166,306 | | Level 3 Asset (In thousands) | Balance Jan 1, 2023 | Balance Sep 30, 2023 | Total gains or losses (9 Months, included in earnings) | | :--------------------------- | :------------------ | :------------------- | :----------------------------------------------------- | | Private equity investments | $178,127 | $165,322 | $16,946 | Note 16. Fair Value of Financial Instruments This note provides the estimated fair values of the Company's financial instruments, categorized by the three-level valuation hierarchy, highlighting subjective estimates - Fair value estimates are subjective and based on judgments regarding future expected loss experience, risk characteristics, and economic conditions, and changes in assumptions could significantly affect these estimates[329] | Financial Asset (In thousands) | Carrying Amount (Sep 30, 2023) | Estimated Fair Value (Sep 30, 2023) | | :----------------------------- | :----------------------------- | :---------------------------------- | | Total loans | $17,129,326 | $16,299,564 | | Investment securities | $10,132,637 | $10,132,637 | | Interest earning deposits with banks | $1,847,641 | $1,847,641 | | Total Financial Assets | $30,056,510 | $29,215,804 | | Financial Liability (In thousands) | Carrying Amount (Sep 30, 2023) | Estimated Fair Value (Sep 30, 2023) | | :--------------------------------- | :----------------------------- | :---------------------------------- | | Non-interest bearing deposits | $7,961,402 | $7,961,402 | | Savings, interest checking and money market deposits | $14,154,275 | $14,154,275 | | Certificates of deposit | $2,974,780 | $3,003,240 | | Total Financial Liabilities | $28,416,762 | $28,448,102 | Note 17. Legal and Regulatory Proceedings This note states that the Company is involved in various legal proceedings, accruing losses for probable and estimable matters - The Company records a loss accrual for legal and regulatory matters where a loss is probable and can be reasonably estimated[302] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive discussion and analysis of the Company's financial condition and results of operations for the three and nine months ended September 30, 2023 - Net income attributable to Commerce Bancshares, Inc. decreased 1.8% for the three months ended September 30, 2023, but increased 3.1% for the nine months ended September 30, 2023, compared to the prior year[310][311] - Net interest income increased 0.9% for the three-month period and 9.0% for the nine-month period year-over-year, driven by higher interest income on loans and Federal Reserve balances, partially offset by increased interest expense on deposits and borrowings[311][339] - Total loans increased by $826.2 million (5.1%) from December 31, 2022, to September 30, 2023, primarily due to growth in business, business real estate, and construction loans[406] - Total deposits decreased by $1.1 billion during the same period[407] Forward-Looking Information This subsection highlights that the report contains forward-looking statements subject to risks and uncertainties, which could cause actual results to differ materially - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from forecasts[334] - No material changes to Risk Factors were disclosed during the quarter ended September 30, 2023, compared to the 2022 Annual Report on Form 10-K[334] Critical Accounting Estimates and Related Policies This subsection identifies the Company's critical accounting estimates as the allowance for credit losses and fair value measurement policies, requiring significant judgment - Critical accounting estimates include the allowance for credit losses and fair value measurement policies, requiring difficult and subjective judgments[335] - No changes in the Company's application of critical accounting policies have occurred since December 31, 2022[335] Summary This section provides a high-level overview of the Company's financial performance for the three and nine months ended September 30, 2023, showing changes in net income and key ratios | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to Commerce Bancshares, Inc. | $120.6 million | $122.8 million | $367.8 million | $356.8 million | | Annualized return on average assets | 1.49% | 1.48% | 1.53% | 1.39% | | Annualized return on average equity | 17.73% | 17.84% | 18.42% | 16.08% | | Efficiency ratio | 58.15% | 55.19% | 57.62% | 57.48% | | Diluted earnings per common share | $0.96 | $0.97 | $2.93 | $2.81 | Net Interest Income Net interest income increased slightly in Q3 2023 YoY and significantly for the nine-month period, driven by higher interest income on loans and Federal Reserve balances | Metric (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $248,547 | $246,373 | $749,708 | $687,544 | | Net yield on earning assets (FTE) | 3.11% | 3.01% | 3.16% | 2.75% | - Interest income on loans (FTE) increased by $85.3 million (49.5%) in Q3 2023 YoY, driven by a 165 basis point increase in average rates and 8.5% growth in average loan balances, particularly in business, business real estate, and construction loans[343] - Total interest expense increased by $95.9 million in Q3 2023 YoY, mainly due to a $69.4 million increase in interest on interest-bearing deposits and a $26.5 million increase on borrowings, reflecting higher rates paid[316] Non-Interest Income Non-interest income increased by $4.4 million (3.2%) in Q3 2023 YoY and $18.5 million (4.5%) for the nine-month period, primarily due to higher trust and bank card fees | Non-Interest Income (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-interest income | $142,949 | $138,514 | $428,166 | $409,710 | | Bank card transaction fees | $46,899 | $45,638 | $143,278 | $131,556 | | Trust fees | $49,207 | $45,406 | $141,800 | $140,009 | | Deposit account charges and other fees | $23,090 | $24,521 | $67,475 | $72,392 | | Other non-interest income | $14,557 | $11,377 | $45,430 | $29,734 | - Bank card transaction fees grew by $1.3 million (2.8%) in Q3 2023 YoY, driven by increases in net merchant fees and net debit card fees[380] - Other non-interest income increased by $3.2 million (28.0%) in Q3 2023 YoY, mainly due to growth in bond underwriting fees and gains on real estate sales[380] Investment Securities Gains (Losses), Net Net investment securities gains were $4.3 million in Q3 2023 and $7.4 million for the nine-month period, primarily from fair value adjustments on private equity investments | Metric (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net gains (losses) on sales of available for sale debt securities | $0 | $(10,692) | $(8,444) | $(20,274) | | Fair value adjustments on private equity investments | $5,605 | $14,050 | $16,946 | $37,133 | | Total investment securities gains (losses), net | $4,298 | $3,410 | $7,384 | $11,602 | - Net gains in Q3 2023 were primarily from $5.6 million in fair value adjustments on private equity investments, offset by $1.2 million in net losses on sales of private equity investments[496] Non-Interest Expense Non-interest expense increased by $15.1 million (7.1%) in Q3 2023 YoY and $47.7 million (7.5%) for the nine-month period, mainly due to higher salaries and benefits | Non-Interest Expense (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Salaries and employee benefits | $146,805 | $137,393 | $436,607 | $415,589 | | Data processing and software | $30,744 | $28,050 | $87,617 | $82,701 | | Net occupancy | $13,948 | $12,544 | $39,702 | $37,343 | | Other | $20,686 | $19,052 | $69,207 | $50,003 | | Total non-interest expense | $228,010 | $212,884 | $679,728 | $632,037 | - Salaries and employee benefits increased by $9.4 million (6.9%) in Q3 2023 YoY, driven by higher full-time salaries and healthcare expenses[353] - Other non-interest expense increased by $19.2 million (38.4%) for the nine months ended September 30, 2023, mainly due to higher FDIC insurance expense, travel and entertainment, and miscellaneous losses[385] Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments This section details the provision for credit losses and net loan charge-offs, which increased significantly in 2023, reflecting a more pessimistic economic forecast | Metric (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for credit losses on loans | $13,343 | $10,150 | $35,155 | $6,751 | | Total net loan charge-offs (recoveries) | $9,784 | $4,812 | $23,047 | $13,418 | | Allowance for Credit Losses on Loans (End of Period) | $162,244 | $143,377 | $162,244 | $143,377 | | Liability for Unfunded Lending Commitments (End of Period) | $27,537 | $30,047 | $27,537 | $30,047 | - The increase in the allowance for credit losses at September 30, 2023, was primarily due to a slightly more pessimistic economic forecast, loan growth, and rising interest rates extending the estimated lives of certain loan portfolios[390] - Annualized net charge-offs on consumer credit card loans were 3.32% in Q3 2023, up from 2.08% in Q3 2022, while total annualized net loan charge-offs were 0.23% in Q3 2023, up from 0.12% in Q3 2022[389] Risk Elements of Loan Portfolio This section discusses the risk elements within the loan portfolio, including non-performing assets, potential problem loans, and specific loan categories | Metric (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------- | :----------- | :----------- | | Non-accrual loans | $8,209 | $8,306 | | Foreclosed real estate | $114 | $96 | | Total non-performing assets | $8,323 | $8,402 | | Non-performing assets as a percentage of total loans | 0.05% | 0.05% | | Total loans past due 90 days and still accruing interest | $18,580 | $15,830 | - Potential problem loans, classified as substandard, decreased by $40.4 million (15.5%) to $219.4 million at September 30, 2023, compared to December 31, 2022[472] | Loan Category (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :----------- | :----------- | | Commercial construction | $1,305,397 | $1,122,105 | | Multi-family residential construction loans | $376,000 | $303,500 | | Total real estate - construction and land loans | $1,539,566 | $1,361,095 | | Business Real Estate Loan Type (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------------------- | :----------- | :----------- | | Owner-occupied | $1,130,922 | $1,136,189 | | Industrial | $585,716 | $478,534 | | Office | $509,493 | $497,601 | | Total real estate - business loans | $3,647,168 | $3,406,981 | - The energy lending portfolio decreased by $39.3 million to $257.2 million at September 30, 2023, comprising 1.5% of total loans[434] Income Taxes This subsection provides information on the Company's income tax expense and effective tax rate for the third quarter of 2023 and comparable periods - Income tax expense was $33.4 million in Q3 2023, with an effective tax rate of 21.7%[405] Financial Condition This section summarizes the Company's balance sheet changes, highlighting an increase in total loans and a decrease in total deposits from December 31, 2022, to September 30, 2023 - Total loans increased by $826.2 million (5.1%) to $17.1 billion at September 30, 2023, driven by growth in business, business real estate, and construction loans[406] - Total deposits decreased by $1.1 billion to $25.1 billion at September 30, 2023, mainly due to a decline in non-interest bearing demand deposits, partially offset by growth in certificates of deposit[407] - Total available-for-sale debt securities decreased by $2.3 billion, with lower balances in asset-backed, state and municipal, and agency mortgage-backed securities[437] Liquidity Management This section discusses the Company's liquidity position, highlighting its liquid assets, core deposit base, and borrowing sources, including available funding capacity | Liquid Assets (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------- | :----------- | :----------- | | Available for sale debt securities | $9,860,828 | $12,238,316 | | Federal funds sold | $2,735 | $49,505 | | Securities purchased under agreements to resell | $450,000 | $825,000 | | Balances at the Federal Reserve Bank | $1,847,641 | $389,140 | | Total | $12,161,204 | $13,501,961 | - Core customer deposits totaled $22.1 billion at September 30, 2023, representing 88.1% of total deposits, providing a stable funding source[440] | Borrowing Source (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------ | :----------- | :----------- | | Federal funds purchased | $506,355 | $159,860 | | Securities sold under agreements to repurchase | $2,238,826 | $2,681,874 | | FHLB advances | $500,000 | $0 | | Total Borrowings | $3,248,770 | $2,851,406 | - The Company has $6.55 billion in available future funding capacity from FHLB and Federal Reserve Bank at September 30, 2023[505] Capital Management This section outlines the Company's capital adequacy, which exceeds well-capitalized institution requirements, and details the treasury stock buyback program | Capital Ratio (as of Sep 30, 2023) | Company Ratio | Minimum for Well-Capitalized Banks | | :--------------------------------- | :------------ | :--------------------------------- | | Tier I common risk-based capital ratio | 15.11% | 6.50% | | Tier I risk-based capital ratio | 15.11% | 8.00% | | Total risk-based capital ratio | 15.90% | 10.00% | | Tier I leverage ratio | 10.87% | 5.00% | - The Company purchased 941,890 shares at an average price of $59.67 during the nine months ended September 30, 2023, under its treasury stock buyback program[447] - The Company is phasing in the estimated capital impact of CECL (ASU 2016-13) by 25% annually, starting January 1, 2022, to be fully phased in by Q1 2025[418] Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies This section addresses the Company's material cash requirements, commitments, and off-balance sheet arrangements, particularly in light of recent banking industry events - The Company repaid $500.0 million of FHLB borrowings in Q3 2023, resulting in $500.0 million outstanding at September 30, 2023[419][420] - Short-term brokered certificates of deposit totaling $401.3 million were outstanding at September 30, 2023, scheduled to mature by December 31, 2023[420] - Loan commitments totaled $14.3 billion at September 30, 2023, including $5.2 billion in unused credit card lines[450] - The Company has outstanding purchase commitments for state tax credits of $55.9 million for the remainder of 2023 and $524.7 million for 2024-2029[421] Segment Results This section provides a summary of pre-tax income results for the Consumer, Commercial, and Wealth segments for the nine months ended September 30, 2023 and 2022 | Segment (In thousands) | Income before income taxes (9 Months Ended Sep 30, 2023) | Income before income taxes (9 Months Ended Sep 30, 2022) | Change (%) | | :--------------------- | :------------------------------------------------------- | :------------------------------------------------------- | :--------- | | Consumer | $116,857 | $108,615 | 7.6% | | Commercial | $245,814 | $227,981 | 7.8% | | Wealth | $97,999 | $108,817 | (9.9%) | | Other/Elimination | $15,288 | $18,812 | (18.7%) | - Consumer segment pre-tax income increased by 7.6% due to higher net interest income, partially offset by lower non-interest income and increased provision for credit losses[452] - Commercial segment pre-tax income increased by 7.8% due to growth in net interest income and non-interest income, partially offset by higher non-interest expense[481] - Wealth segment pre-tax income decreased by 9.9% due to lower net interest income and higher non-interest expense, partially offset by higher non-interest income[425] Regulatory Changes This section discusses recent and proposed regulatory changes, including a proposed FDIC special assessment and the Company's completion of its LIBOR transition - The FDIC proposed a special assessment of 12.5 basis points annually on uninsured deposits (excluding the first $5 billion) to recover losses from bank failures, estimated to impact the Company by $14.9 million[455] - The Company completed its transition from LIBOR during the first half of 2023, aligning with extended FASB guidance[456] - New SEC rules require enhanced disclosures on material cybersecurity incidents (Form 8-K) and annual reporting on cybersecurity risk management, strategy, and governance (Form 10-K), effective December 2023[427] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Company's interest rate risk management, focusing on earnings simulation models to analyze net interest income sensitivity - The Company uses earnings simulation models to analyze net interest income sensitivity to interest rate movements, performing monthly simulations[461] - Interest rate risk is slightly improved compared to the previous quarter, primarily due to a decrease in wholesale funding and changes in deposit account rate sensitivities[463] | Interest Rate Shift | Sep 30, 2023 Change in Net Interest Income ($ millions) | Sep 30, 2023 % Change in Net Interest Income | | :------------------ | :------------------------------------------------------ | :------------------------------------------- | | 300 basis points rising | $(20.6) | (2.08)% | | 200 basis points rising | $(17.7) | (1.79)% | | 100 basis points rising | $(9.1) | (0.92)% | | 100 basis points falling | $(0.6) | (0.06)% | | 200 basis points falling | $(11.0) | (1.11)% | | 300 basis points falling | $(27.0) | (2.71)% | Item 4. Controls and Procedures This section confirms that the Company's management evaluated the effectiveness of disclosure controls and procedures as of September 30, 2023, and found them effective - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[491] - No material changes in internal control over financial reporting occurred during the last fiscal quarter[491] PART II: OTHER INFORMATION Other Information Item 1. Legal Proceedings This section refers to Note 17, Legal and Regulatory Proceedings, for information on the Company's legal proceedings - Information on legal proceedings is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings[172] Item 1A. Risk Factors This section updates the risk factors from the 2022 Annual Report, emphasizing liquidity and capital risks stemming from recent banking industry events and rising interest rates - Recent banking industry events (e.g., Silicon Valley Bank failure) have decreased confidence in regional banks, leading to potential adverse impacts on the Company's stock price, liquidity, and interest expenses[164][180][181] - Rapidly rising interest rates have resulted in $1.6 billion in unrealized losses in the Company's available-for-sale debt securities portfolio at September 30, 2023, posing a risk of significant losses if these investments were sold before maturity[164][165][182] - Potential changes to regulations, regulatory policies, or supervisory activities arising from recent banking events could increase the Company's expenses, limit services, or subject it to higher capital requirements[166][183] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's common stock repurchases under Board authorizations for the three months ended September 30, 2023 | Period | Total Number of Shares Purchased | Average Paid Price per Share | Maximum Number that May Yet Be Purchased Under the Program | | :----------------- | :------------------------------- | :--------------------------- | :--------------------------------------------------------- | | July 1 - 31, 2023 | 26,643 | $52.93 | 2,531,829 | | August 1 - 31, 2023| 305,314 | $51.24 | 2,226,515 | | Sep 1 - 30, 2023 | 56,347 | $48.49 | 2,170,168 | | Total | 388,304 | $50.96 | 2,170,168 | - As of September 30, 2023, 2,170,168 shares remained available for purchase under the Board's April 2022 authorization of 5,000,000 shares[185] Item 5. Other Information This section states that no officers or directors adopted or terminated Rule 10b5-1 trading arrangements during the three months ended September 30, 2023 - No officers or directors adopted or terminated Rule 10b5-1(c) trading arrangements during the three months ended September 30, 2023[186] Item 6. Exhibits This section lists the exhibits filed as part of the report, including the Amended and Restated Executive Incentive Compensation Plan and certifications - Exhibits include the Amended and Restated Executive Incentive Compensation Plan, CEO and CFO certifications (Sarbanes-Oxley Act), and Interactive Data Files in Inline XBRL format[170][173][174][187]