Commerce Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results. Commerce Bank conducts most of the company’s operations.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $214.0 million | $216.0 million | $627.8 million | $620.1 million |
| Net interest margin, tax-equivalent | 2.58% | 2.97% | 2.63% | 3.07% |
| Net income attributable to Commerce Bancshares | $122.6 million | $132.4 million | $415.9 million | $224.2 million |
| Net income available to common shareholders | $122.6 million | $125.0 million | $415.9 million | $212.2 million |
| Diluted earnings per common share | $1.05 | $1.06 | $3.54 | $1.80 |
| Non-interest income | $137.5 million | $129.6 million | $412.7 million | $370.8 million |
| Non-interest expense | $211.6 million | $190.9 million | $602.3 million | $572.1 million |
| Net securities gains (losses) | $13.1 million | $16.2 million | $39.8 million | $(1.3) million |
- Profitability and margins: Q3 net income attributable to the company fell 7.5% year over year; diluted EPS declined 0.9%. The nine-month increase in net income attributable to the company was 85.5%. Returns on average assets and equity were 1.40% and 13.74% for Q3, and 1.65% and 16.14% for the nine-month period. The efficiency ratio was 59.95% for Q3 and 57.76% year to date.
- Credit costs and asset quality: The Q3 provision for credit losses was a benefit of $7.4 million, versus a $3.1 million expense in Q3 2020. The nine-month provision was a benefit of $59.3 million, compared with $141.6 million of expense in 2020. Net loan charge-offs were $3.7 million in Q3 and $14.3 million year to date. The allowance for loan losses was $162.8 million, or 1.07% of loans, at quarter end. Non-performing assets were $10.5 million, 0.03% of total assets.
- Balance sheet and liquidity, September 30: Assets were $34.5 billion; loans were $15.1 billion, net loans $15.0 billion; deposits were $28.1 billion; and total equity was $3.49 billion. Cash, cash equivalents and restricted cash were $2.25 billion. The company reported $17.8 billion in liquid assets, including available-for-sale securities, resale agreements and Federal Reserve balances. Core deposits were $26.5 billion, or 94.3% of deposits.
- Funding and debt: Federal funds purchased, repurchase agreements and other borrowings totaled approximately $2.26 billion, principally customer repurchase agreements. The filing reports no outstanding FHLB advances and no subordinated debt. Nine-month cash flows were $486.1 million provided by operations, $1.63 billion used in investing and $1.19 billion provided by financing; cash, cash equivalents and restricted cash increased $43.2 million.
- Capital: Tier 1 common and Tier 1 risk-based capital ratios were 14.02%; total risk-based capital was 14.83%; Tier 1 leverage was 9.31%. The company said it exceeded applicable well-capitalized thresholds. Tangible common equity to tangible assets was 9.71%.
Material changes versus comparable periods
- Q3 net interest income declined 0.9% as lower loan and resale-agreement interest income more than offset lower deposit funding costs and higher securities income. Net interest margin declined from 2.97% to 2.58% year over year.
- Non-interest income increased 6.1% in Q3, led by trust and bank-card fees. Nine-month non-interest income rose 11.3%, also reflecting higher trust, card and loan fees.
- Q3 non-interest expense increased 10.9%, including an $8.2 million non-recurring litigation settlement, higher compensation and data-processing costs. Nine-month expense rose 5.3%.
- Q3 securities gains were mainly $13.0 million of private-equity fair-value gains. Nine-month securities gains included $38.0 million of private-equity fair-value gains and a $1.6 million realized gain. These items contributed to year-to-date earnings growth.
- Loans declined $1.2 billion, or 7.4%, from year-end 2020, primarily as PPP loan balances ran off; construction and consumer loans grew. Deposits increased $1.2 billion. Available-for-sale securities increased by about $1.9 billion on an amortized-cost basis.
- PPP balances were $307.9 million at quarter end; 97% of first-round and 35% of second-round balances had been forgiven. Management expected most remaining balances to be forgiven in Q4 2021.
- Available-for-sale securities had $72.0 million of gross unrealized losses at quarter end, compared with $6.4 million at December 31, 2020. Management attributed these losses primarily to interest rates and market conditions and stated it did not expect to be required to sell the securities before recovery. The decline in securities marks also contributed to lower accumulated other comprehensive income.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management’s allowance forecast assumed an ongoing, optimistic recovery, while citing uncertainty related to COVID-19, inflation and supply constraints. Allowance estimates depend on economic forecasts and other significant judgments.
- Management described the balance sheet as highly liquid, supported by core deposits, liquid securities and approximately $3.0 billion of estimated available future advances from the FHLB and Federal Reserve, subject to collateral availability.
- Interest-rate simulations indicated higher net interest income under modeled rising-rate scenarios. A separate scenario incorporating deposit attrition also showed increases, but the company cautioned that deposit behavior and rate effects are uncertain.
- Off-balance-sheet commitments included $13.3 billion of loan commitments, including $5.0 billion of unused approved credit-card lines; standby letters of credit were $423.6 million. Commitments may expire unused and are not equivalent to expected cash outflows.
- The company had various legal proceedings in the normal course of business. It accrues losses when probable and reasonably estimable; some matters were too early to assess. The filing does not provide a clear aggregate exposure.
- The company had a $106.6 million office-development agreement, with $43.7 million paid by quarter end, and expected to fund $42.3 million of outstanding state tax-credit purchase commitments during the rest of 2021.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the decline in net interest margin persists, particularly as PPP balances run off and interest rates or deposit costs change.
- How much reported earnings depend on credit-loss reserve releases and private-equity fair-value gains, and whether these items recur.
- Whether loan growth, credit quality and the allowance remain consistent with management’s recovery assumptions, including risks from COVID-19, inflation and economic conditions.
- The trajectory and potential earnings impact of expense growth, including litigation, compensation and technology costs.
- Liquidity and funding sensitivity to deposit outflows, collateral requirements and repurchase-agreement funding; also monitor unrealized securities losses and capital effects.
- Developments in legal proceedings, PPP forgiveness, outstanding commitments and the office-development project; the filing does not quantify an aggregate legal-loss exposure.