Commerce Bancshares, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2021, compared with Q1 2020. The company operates primarily through Commerce Bank, with Consumer, Commercial and Wealth segments.
Key financial results
- Profit: Net income attributable to Commerce Bancshares was $131.0 million, up 152.6% from $51.9 million. Diluted EPS was $1.11, versus $0.42. Return on average assets was 1.63%; return on average equity was 15.69%.
- Revenue and margins: Net interest income rose 2.3% to $205.7 million; non-interest income increased 10.0% to $136.0 million. Net interest margin on a tax-equivalent basis was 2.71%, down from 3.33%. The efficiency ratio improved to 56.37% from 59.17%.
- Credit costs: The income statement reported a net provision recovery of $6.2 million, compared with $58.0 million of provision expense in Q1 2020. The loan allowance was $200.5 million, or 1.22% of loans, down from $220.8 million, or 1.35%, at year-end 2020. Net charge-offs were $10.0 million, or 0.25% annualized.
- Balance sheet: Total assets were $33.3 billion; loans were $16.4 billion and deposits $27.4 billion at March 31. Deposits increased $473.9 million from year-end, while loans increased $62.4 million. Non-interest-bearing deposits were $11.1 billion.
- Cash flow and liquidity: Operating activities provided $201.7 million; investing activities used $327.7 million; financing activities provided $298.6 million. Cash, cash equivalents and restricted cash increased $172.5 million to $2.38 billion. Liquid assets totaled $15.4 billion, and the average loans-to-deposits ratio was 61.79%.
- Debt and capital: Federal funds purchased and repurchase agreements totaled approximately $1.94 billion at quarter-end; there were no FHLB advances outstanding. Regulatory capital ratios included 13.76% Tier 1 common and 14.79% total risk-based capital. The company reported no significant long-term debt.
Changes versus Q1 2020 and year-end 2020
- Profit increased substantially, reflecting the swing from provision expense to a recovery, higher non-interest income, and a shift from investment-securities losses to gains. Q1 2021 included $9.9 million of securities gains, mainly private-equity fair-value gains and a realized gain on a private-equity sale; Q1 2020 had $13.3 million of securities losses.
- Lower deposit and borrowing costs lifted net interest income, partly offset by lower loan yields and interest income. The tax-equivalent yield on earning assets fell to 2.76% from 3.66%.
- Loan balances were up 11.2% on average year over year, including PPP lending; quarter-end PPP loans were $1.4 billion. Investment securities available for sale were $12.5 billion, with purchases exceeding maturities and paydowns during the quarter.
- Non-performing assets declined to $23.7 million from $26.6 million at year-end. However, potential problem loans increased 18.6% to $429.1 million. Securities in an unrealized loss position rose to $5.3 billion, with $105.4 million of unrealized losses, primarily attributed to interest rates and market conditions; management reported no identified credit losses on these securities.
- Other comprehensive income was materially negative: comprehensive loss attributable to the company was $31.7 million, largely due to unrealized losses on available-for-sale securities and cash-flow hedge derivatives. This contrasted with $194.5 million of comprehensive income in Q1 2020.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s credit-loss estimate assumes continued economic recovery, improving health conditions and vaccine distribution, and considers government stimulus. It emphasizes ongoing uncertainty related to COVID-19 and changing economic forecasts.
- Credit risks include pandemic-sensitive commercial exposures of $1.37 billion, active payment deferrals totaling $133.4 million, and the increase in potential problem loans. Consumer credit-card net charge-offs rose to 5.98% annualized; management attributed the quarter’s increase partly to deferred delinquency and charge-off progression after temporary COVID relief ended.
- Interest-rate and funding risks remain relevant. Simulations showed higher modeled net interest income under rising-rate scenarios, but results depend on deposit attrition assumptions; management noted deposit behavior is difficult to predict. The company also flagged COVID-19, economic conditions, regulation, competition, cybersecurity and other risks in its forward-looking statements.
- Unusual or notable items included a $2.4 million gain on the sale of a branch, a $9.9 million net securities gain, a $10.4 million loan-provision recovery partly offset by a $4.1 million provision for unfunded commitments, and $25.9 million of treasury-stock purchases. The company had $13.3 billion of loan commitments, including $4.9 billion in unused approved credit-card lines, and $440.4 million of standby letters of credit.
- Legal proceedings were described as arising in the ordinary course; some matters were too early-stage to determine whether a loss was probable and estimable. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the sustainability of earnings growth excluding provision releases, securities gains and the branch-sale gain.
- Track potential problem loans, pandemic-sensitive exposures, active deferrals, credit-card charge-offs and allowance assumptions as economic forecasts evolve.
- Assess the effect of falling asset yields, deposit pricing and potential deposit outflows on net interest margin and liquidity.
- Review the size and duration of unrealized securities losses, pledged securities and sensitivity of equity to interest-rate movements.
- Monitor PPP forgiveness and repayment timing, capital ratios, buybacks and dividends, and the significant unfunded lending commitments.