Commerce Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless stated otherwise. Commerce Bancshares is a regional bank holding company operating principally through Commerce Bank. The unaudited results reflect the early effects of the COVID-19 pandemic.
Financial results and key metrics
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income | $201.1 | $203.5; down 1.2% |
| Net interest income after credit-loss provision | $143.1 | $191.0 |
| Provision for credit losses | $58.0 | $12.5 |
| Non-interest income | $123.7 | $121.2; up 2.0% |
| Investment securities losses, net | $13.3 | $0.9 |
| Non-interest expense | $193.7 | $191.4; up 1.2% |
| Income before income taxes | $59.8 | $119.9 |
| Net income available to common shareholders | $49.6 | $94.9; down 47.7% |
| Diluted earnings per common share | $0.44 | $0.81 |
| Net yield on interest-earning assets | 3.33% | 3.52% |
| Return on average assets / common equity | 0.80% / 6.48% | 1.58% / 13.64% |
| Efficiency ratio | 59.17% | 58.76% |
Reported consolidated net income was $49.6 million. Net income attributable to Commerce Bancshares, Inc. was $51.9 million; the difference reflects the filing’s presentation of non-controlling interest.
Balance sheet, funding, and capital
- Total assets were $26.8 billion, up from $26.1 billion at year-end. Loans were $15.1 billion, up $336.0 million; deposits were $20.8 billion, up $255.4 million.
- The allowance for credit losses on loans was $171.7 million, or 1.14% of loans, versus $160.7 million, or 1.09%, at year-end. The separate liability for unfunded lending commitments was $32.3 million.
- Core deposits totaled $19.0 billion, 91.5% of total deposits. Borrowings reported in the liquidity discussion totaled $2.18 billion, including $750 million of FHLB advances; other borrowings on the balance sheet rose to $756.5 million from $2.4 million.
- Cash, cash equivalents, and restricted cash ended the quarter at $899.5 million. Cash from operations was $79.8 million; investing activities used $281.6 million and financing activities provided $193.5 million.
- Risk-based capital ratios were 13.52% for Tier 1 common, 14.24% for Tier 1, and 15.21% total; the Tier 1 leverage ratio was 11.13%. Management reported ratios above well-capitalized thresholds.
- The common dividend was $0.27 per share, up from $0.248 a year earlier. The company repurchased 869,692 shares for approximately $53.1 million during the quarter.
Material changes and management commentary
- Credit costs rose sharply. The $58.0 million provision included $42.9 million for loans and $15.1 million for unfunded commitments. Management cited a deteriorating COVID-19 economic outlook and a forecast of a sharp recession with recovery into 2021. The forecast and expected-loss estimates were described as highly uncertain.
- CECL adoption. The company adopted the current expected credit loss standard on January 1, 2020. Adoption increased retained earnings by $3.8 million, reduced the loan allowance by $21.0 million, and increased the unfunded-commitment liability by $16.1 million. Regulatory capital effects were elected for two-year deferral followed by phased recognition.
- Market-related losses. Net investment securities losses were $13.3 million, primarily a $13.0 million fair-value loss on private-equity investments attributed to pandemic-related economic conditions. The company reported no credit-loss allowance on available-for-sale debt securities at quarter-end.
- Revenue and costs. Lower loan and securities yields reduced net interest income, partly offset by lower deposit and borrowing costs and higher average loan balances. Trust, capital-market, deposit-account, and bank-card fees supported non-interest income growth. Salaries and data-processing costs increased.
- COVID-19 lending developments after quarter-end. As of April 30, commercial payment-deferral requests covered $409.6 million of balances, and personal-banking requests covered $126.9 million. In April, the company secured $1.6 billion of SBA Paycheck Protection Program loans for 6,759 customers; management believed most balances would be forgiven by the SBA.
- Other pandemic exposures. Identified pandemic-sensitive industries represented $2.57 billion, or 17.0% of loans, with $854.7 million of related unfunded commitments. Energy loans totaled $201.1 million; special-mention energy balances had risen to 8.6% of that portfolio from 3.5% at year-end.
- Mortgage activity. The company temporarily paused sales of certain residential mortgage loans and related hedging as COVID-19 market volatility impaired its ability to hedge production.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management said liquidity needs could vary more than in recent years because of COVID-19 but believed the company could meet cash-flow needs. Principal uncertainties include the pandemic’s duration and economic effects, customer payment performance, credit losses and collateral values, interest rates and net interest income, funding and deposit behavior, and investment valuations. The filing also identifies cybersecurity, regulatory, competitive, and accounting risks.
Commitments included $11.9 billion of loan commitments, including approximately $5.0 billion of unused approved credit-card lines; $398.8 million of standby letters of credit; and $120.0 million of expected tax-credit purchase commitments to be funded during the remainder of 2020. The company reported ordinary-course legal proceedings; some matters were too early to estimate, and no clear aggregate exposure value was provided.
Investor verification priorities
- Monitor subsequent credit-loss provisions, CECL forecast assumptions, loan delinquencies, criticized loans, charge-offs, and the adequacy of the $171.7 million loan allowance and $32.3 million unfunded-commitment liability.
- Verify the extent and performance of COVID-19 deferrals, PPP loan forgiveness and servicing, and exposures to hotels, retail, energy, and other sensitive industries.
- Track net interest margin and deposit/funding costs after Federal Reserve rate cuts, including changes in borrowings and the availability of liquidity facilities.
- Assess whether private-equity valuation losses, mortgage-servicing-rights impairment, and mortgage-sale interruptions persist or produce further earnings effects.
- Confirm capital ratios, share repurchases, and dividend policy as pandemic-related losses and credit needs develop; review any material updates to legal contingencies.