CBSH - Commerce Bancshares Q3 Earnings: Strong Show In Challenging Environment

2023-10-20 05:07:06 ET

Summary

• Commerce Bancshares reported Q3 earnings with a beat in EPS but a revenue miss.
• Uninsured deposits remain low for a regional bank, showing stability.
• The company's dividend looks secure, and it has a diversified revenue stream, but expenses and declining deposits are to be monitored.

Commerce Bancshares, Inc. (CBSH) released its Q3 earnings report pre-market on Wednesday, October 18th, as Seeking Alpha has covered here . GAAP EPS beat by 3 cents while revenue missed by $1.3 million. After seesawing in a fairly tight range (for an earnings day), the stock closed down ~1%.

Background

Commerce Bancshares, Inc. is a regional bank holding company that was founded in 1865. It is not an overstatement to say regional banks have had it very rough this year with liquidity and interest rate concerns. On paper, higher rates should help banks due to the spread between the rates they charge and what they pay as interest. But regional banks are looked down during rough times as the quality of their loan and deposit portfolio comes into scrutiny.

Commerce Bancshares offers all 4 traditional wings of banking business: personal, business, wealth, and large corporate. The company went public in 2003 and is now the 20th largest U.S bank based on market cap. For more history, please visit the company's website where its rich 150+ years' history is well documented.

While that background sounds impressive, how is the bank operating in the current challenging environment? More specifically, how did the recent Q3 turn out? Let's find out in this edition of The Good, The Bad, and The Ugly.

The Good

• Let's get to the most concerning point about regional bank these days. Uninsured deposits. Commerce Bancshares' uninsured deposits remained constant QoQ at 32% of its total deposits at the end of Q3. This is handily below the 45% national average . This is especially impressive when you consider this is a regional bank we are talking about.

• Average loans in Q3 once again went up QoQ, by 1.8% over Q2, which was up 1.6% from Q1. It is encouraging to see that even when rates are crazy high, Commerce Bancshares has managed to squeeze in a small growth in this area. In all, the company had loaned $17.1 billion at the end of Q3 compared to $25.1 billion it had in deposits (covered below).
• With Q3's EPS coming in 3 cents above the estimates at 96 cents, Commerce Bancshares' dividend looks even safer than before. With the revised forward FY 2023 estimate at $3.79/share now, the stock has a forward payout ratio of 28.50%. In short, the company looks set to continue its rich dividend growth history ( 54 years ).
• Commerce Bancshares continues being solidly diversified with 36% of its revenue coming through fees for its various programs like wealth management at the end of Q3. The bank appears diversified within its segments too. For example, the loan portfolio consists of various industries including personal real estate, business real estate, and construction.

The Bad and The Ugly

• YoY, non-interest expense went up more than 7.10% in the September quarter and 7.50% for the first 9 months of the year. It is very important for any business, let alone a bank and a regional one at that, to not over-indulge in good times. I find the 7% jump in expenses concerning given that total revenue went up just 1% YoY in the most recent quarter.

• Cash on hand at Federal Reserve Bank declined to $1.8 billion in Q3 compared $2.6 billion at the end of Q2 . That's not what you'd want to see at a time when liquidity concerns are still real and at the forefront .

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