Commerce Bancshares, Inc. — Q2 2021 Form 10-Q
Business context and reporting period: Commerce Bancshares is a bank holding company whose principal operations are conducted through Commerce Bank, with Consumer, Commercial and Wealth segments. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $208.0 million | $203.1 million | $413.7 million | $404.1 million |
| Non-interest income | $139.1 million | $117.5 million | $275.2 million | $241.2 million |
| Investment securities gains (losses), net | $16.8 million | $(4.1) million | $26.7 million | $(17.4) million |
| Credit-loss provision (benefit) | $(45.7) million | $80.5 million | $(51.9) million | $138.5 million |
| Net income attributable to Commerce Bancshares | $162.3 million | $39.9 million | $293.3 million | $91.7 million |
| Diluted earnings per common share | $1.38 | $0.32 | $2.49 | $0.74 |
| Non-interest expense | $198.1 million | $187.5 million | $390.7 million | $381.2 million |
- Profitability and margins: Q2 return on average assets was 1.93%, return on average common equity 19.12%, and efficiency ratio 56.90%. Net yield on interest-earning assets was 2.60%, down from 2.94% a year earlier. First-half net interest margin was 2.65%, versus 3.12%.
- Balance sheet at June 30: Assets were $33.9 billion; loans were $15.6 billion, down 4.3% from year-end 2020; deposits were $27.5 billion, up $539.5 million; and total equity was $3.49 billion. The loan-to-deposit ratio was 57.78% for Q2.
- Credit quality: Loan allowance was $172.4 million, or 1.10% of loans, compared with $220.8 million, or 1.35%, at year-end. Non-performing assets were $11.4 million (0.07% of loans), down from $26.6 million (0.16%) at year-end. Net charge-offs were $0.7 million in Q2; annualized net charge-offs were 0.02% of average loans.
- Cash flow and liquidity: For the first half, operating activities provided $327.2 million, investing activities used $696.2 million, and financing activities provided $706.9 million. Cash, cash equivalents and restricted cash increased $338.0 million to $2.55 billion. Reported liquid assets totaled $16.76 billion. Core deposits were $25.7 billion, 93.6% of deposits.
- Borrowings and capital: Borrowings totaled $2.32 billion, primarily customer repurchase agreements; no FHLB advances were outstanding. The company reported no subordinated debt. June 30 regulatory ratios included a 14.20% Tier 1 common risk-based capital ratio, 15.07% total risk-based capital ratio, and 9.36% Tier 1 leverage ratio.
Material changes versus comparable periods
- Q2 net income rose substantially, chiefly reflecting a $126.2 million favorable year-over-year swing in credit-loss provision and a $20.9 million improvement in securities results. First-half provision was a $51.9 million benefit versus $138.5 million of expense in 2020.
- Net interest income grew 2.4% in both Q2 and the first half. Lower deposit and borrowing costs and higher investment-security income offset weaker loan interest income and lower asset yields.
- Non-interest income increased 18.4% in Q2, led by bank card and trust fees, and 14.1% in the first half. Non-interest expense increased 5.7% in Q2 and 2.5% in the first half.
- Loans declined $710.8 million from December 2020, largely as PPP balances ran off; deposits increased $539.5 million. Investment securities increased, with purchases exceeding maturities and paydowns.
Outlook, commentary and risks
- Management attributed reserve releases to an improving economic outlook, vaccine availability and lower-than-projected charge-offs. Its allowance forecast assumed an ongoing recovery but retained uncertainty around COVID-19 disruptions and inflation. The filing provides no specific earnings or revenue guidance.
- Q2 securities gains were primarily unrealized fair-value gains on private equity investments ($16.7 million); first-half securities gains included $25.0 million of private equity fair-value gains and a $1.6 million realized gain. These valuation-dependent items materially supported reported earnings.
- Management identified allowance estimates and investment-security valuation as areas requiring significant judgment. Economic conditions, the pandemic, interest rates, loan demand, regulation, competition and cybersecurity were among the disclosed risks. Interest-rate simulations showed higher modeled net interest income under rising-rate scenarios, but outcomes depend on deposit behavior and assumptions.
- Potential problem loans were $386.2 million, up 6.8% from year-end. The energy portfolio was $238.8 million, with 7.7% rated substandard and 1.1% non-accrual. Commercial real estate and COVID-affected borrowers remain credit risks.
- Off-balance-sheet commitments included $13.2 billion in loan commitments, $412.7 million in standby letters of credit and $9.5 million in commercial letters of credit. The company also expected to fund $125.0 million of tax-credit purchase commitments during the remainder of 2021 and had a $106.6 million office-development agreement, with $33.0 million paid by June 30.
- Various legal proceedings were pending in the ordinary course; the filing says some matters were too early for a probable and estimable loss determination. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- How much of earnings growth is repeatable after excluding reserve releases and private equity fair-value gains?
- Whether deposit costs, loan yields and the net interest margin stabilize or continue to compress, and how deposit balances respond to rate changes.
- Whether loan performance and reserve adequacy hold up as economic forecasts change; monitor potential problem loans, commercial real estate, energy lending and credit-card charge-offs.
- PPP forgiveness pace and related fee recognition, alongside the trend in total loans and core deposits.
- Capital and liquidity capacity relative to repurchase agreements, commitments, planned office spending and tax-credit obligations.