Commerce Bancshares, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Commerce Bancshares is a regional 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, 2022; comparisons below are with Q1 2021 unless noted. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Net interest income | $208.8 | Up 1.5% year over year |
| Net interest margin, tax-equivalent | 2.45% | 2.71% in Q1 2021 |
| Non-interest income | $131.8 | Down 3.1% |
| Net securities gains | $7.2 | $9.9 in Q1 2021; current-quarter gains were mainly private-equity fair-value gains |
| Non-interest expense | $205.6 | Up 6.8% |
| Net income attributable to Commerce Bancshares | $118.2; diluted EPS $0.97 | Down 9.8%; EPS was $1.06 |
| Efficiency ratio | 60.29% | 56.37% in Q1 2021 |
| Loans / deposits | $15.46 billion / $29.32 billion at quarter-end | Loans up $282.7 million and deposits down $493.7 million from December 31, 2021 |
| Allowance for loan losses | $134.7; 0.87% of loans | $150.0, or 0.99%, at December 31, 2021 |
| Liquidity and borrowings | $17.87 billion in reported liquid assets; $2.33 billion in borrowings | Liquid assets were $20.05 billion and borrowings $3.04 billion at December 31, 2021 |
| Regulatory capital | Tier 1 common 13.92%; total risk-based 14.61%; Tier 1 leverage 9.07% | All exceeded well-capitalized thresholds |
- Earnings drivers: Higher investment-securities income, card fees and trust fees supported results. Lower loan interest income, lower loan fees and mortgage revenue, and higher operating costs weighed on earnings. Salaries and benefits rose 5.4%; data processing and software expense rose 6.1%.
- Credit costs and quality: The income statement reflected a net credit-loss benefit of $9.9 million, versus a $6.2 million benefit in Q1 2021. Management cited an improved economic forecast and lower-than-projected charge-offs. Net charge-offs were $4.6 million, or 0.12% annualized, versus $10.0 million, or 0.25%, a year earlier. Non-performing assets were $8.6 million, while potential problem loans increased 10% from year-end to $306.6 million.
- Cash flow: Cash, cash equivalents and restricted cash fell $2.69 billion in Q1. Operating activities provided $124.5 million; investing activities used $1.51 billion and financing activities used $1.31 billion, including a $511.6 million net deposit decline and lower repurchase-agreement funding.
- Balance-sheet marks: Available-for-sale debt securities had a $690.1 million gross unrealized loss at quarter-end, compared with $132.9 million at year-end. The resulting Q1 other comprehensive loss was $511.5 million after tax, and accumulated other comprehensive income moved from positive $77.1 million to a deficit of $434.4 million. Management attributed unrealized losses primarily to interest rates and market conditions, and stated it did not expect to be required to sell the securities before recovery.
Changes, outlook, risks and contingencies
- Net income fell despite a modest increase in net interest income, chiefly as expenses increased and non-interest income and securities gains declined. Tax-equivalent net interest margin also narrowed year over year.
- Loan balances grew from year-end while deposits and total assets declined. Management reported that 97% of PPP loan balances had been forgiven; $53.4 million remained at March 31, 2022.
- Management provided no specific earnings or financial guidance in the supplied filing text. It said liquidity was adequate to meet obligations and identified loan growth and possible deposit maturities or withdrawals as principal near-term cash requirements.
- Credit-loss estimates incorporate uncertainty from elevated inflation, Russia’s invasion of Ukraine, supply-chain constraints and the continuing economic recovery. Management cautioned that changes in these conditions could alter forecasts and allowance estimates.
- Interest-rate simulations showed lower asset sensitivity than at year-end. In the +100, +200 and +300 basis-point scenarios, modeled 12-month net interest income increased 3.86%, 7.03% and 9.21%, respectively, without modeled deposit attrition; with assumed deposit attrition, increases were 1.58%, 1.73% and 0.94%. Actual deposit behavior is uncertain.
- Off-balance-sheet exposures included $13.0 billion in loan commitments, $502.1 million in standby letters of credit and $1.4 billion in commercial letters of credit. A $106.7 million office-building development was in progress; $63.3 million had been paid by quarter-end. The company also expected to fund $167.3 million in state tax-credit purchase commitments during the rest of 2022.
- Various legal proceedings were pending in the ordinary course of business; the filing does not provide a clear aggregate exposure. Management reported no material changes to the risk factors disclosed in its 2021 Form 10-K. It stated that disclosure controls were effective and that no material internal-control changes occurred during the quarter.
- The company repurchased 795,387 shares in Q1 at an average $70.22 per share and paid a $0.265 quarterly dividend. On April 20, 2022, the Board increased the repurchase authorization to 5 million shares.
Important facts for investors to verify
- How rising rates, securities reinvestment and deposit pricing affect net interest margin and deposit retention; assess the substantial unrealized AFS losses alongside portfolio duration and liquidity.
- Whether the improvement in charge-offs and allowance estimates persists, particularly given higher potential problem loans and economic uncertainty.
- Whether fee income and expense trends improve, and how much earnings depend on private-equity fair-value gains and other variable items.
- Review the composition and stability of deposits, collateralized repurchase funding, capital ratios and the effects of continued share repurchases and dividends.
- Track progress and remaining cash requirements for the office-building project, tax-credit commitments and unfunded lending commitments.