Business context and reporting period
Commerce Bancshares, Inc. is a Missouri-based bank holding company whose operations are primarily conducted through Commerce Bank, alongside Consumer, Commercial and Wealth businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; comparisons are primarily with 2021. Dollar amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2022 | Six months 2022 | Comparison |
|---|---|---|---|
| Net interest income | $232.4 million | $441.2 million | Up 11.7% and 6.6%, respectively, year over year |
| Provision for credit losses | $7.2 million expense | $2.7 million recovery | Q2 2021 had a $45.7 million recovery; first-half 2021 had a $51.9 million recovery |
| Non-interest income | $139.4 million | $271.2 million | Up 0.2% and down 1.5%, respectively |
| Investment securities gains, net | $1.0 million | $8.2 million | Compared with $16.8 million and $26.7 million in 2021 |
| Non-interest expense | $213.5 million | $419.2 million | Up 7.8% and 7.3%, respectively |
| Net income attributable to Commerce Bancshares | $115.8 million; diluted EPS $0.96 | $233.9 million; diluted EPS $1.93 | Net income down 28.7% and 20.2%, respectively |
Q2 return on average assets was 1.36%, return on average equity 16.29%, and efficiency ratio 57.29%. For the first half, these were 1.35%, 15.28%, and 58.72%. Tax-equivalent net yield on earning assets was 2.79% in Q2; first-half net interest margin was 2.62%, versus 2.65% a year earlier.
At June 30, 2022, total assets were $33.4 billion, down from $36.7 billion at year-end 2021. Loans were $15.7 billion, up 3.4% since year-end; deposits were $28.2 billion, down $1.6 billion. Borrowings were $2.2 billion, down about $795 million, primarily reflecting lower customer repurchase agreements. The filing reports no subordinated debt and no FHLB advances outstanding.
Six-month operating cash flow was $286.2 million; investing activities used $799.4 million and financing activities used $2.7 billion. Cash, cash equivalents and restricted cash fell $3.2 billion to $1.1 billion. Available-for-sale securities had a $1.1 billion unrealized loss at quarter-end; accumulated other comprehensive income was a loss of $766.9 million, versus income of $77.1 million at year-end. The reported Tier 1 common risk-based capital ratio was 13.95%, total risk-based capital ratio 14.64%, and Tier 1 leverage ratio 9.45%.
Material changes versus prior periods
- Higher investment-securities interest income drove net interest income growth, while loan interest income declined. Q2 securities interest income also included $6.5 million of non-accrual interest received on a private-equity investment sale.
- Profit declined as the prior-year credit-loss benefit and securities gains were substantially larger, while compensation, technology and other operating costs increased. First-half loan fees and sales fell 57.6%, primarily due to lower mortgage banking revenue.
- The available-for-sale portfolio’s fair value declined as market rates rose: unrealized losses increased from $132.9 million at December 31, 2021 to $1.092 billion at June 30, 2022. Management said the losses were primarily rate- and market-related, did not identify credit losses, and did not expect to be required to sell securities before recovery.
- Deposits declined, particularly business demand deposits, and cash held at the Federal Reserve declined. Loans grew, notably business real estate, construction and business lending.
- Potential problem loans increased 14.5% to $319.2 million from year-end. Troubled debt restructurings rose to $142.4 million from $64.9 million; non-performing assets were $8.2 million, or 0.05% of loans.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management’s credit-loss assumptions reflected continued economic momentum but heightened uncertainty around inflation, monetary tightening, supply constraints, geopolitical conditions and the possibility of recession. Management considered the allowance adequate; the loan allowance was $138.0 million, or 0.88% of loans, at June 30.
Liquidity sources included $15.9 billion of liquid assets, $27.2 billion of core deposits and reported available future advances of approximately $2.7 billion through the FHLB and Federal Reserve. Management said liquidity was sufficient to meet obligations. Approximately $2.2 billion of securities maturities and paydowns were expected over the next 12 months. The filing also cites $13.1 billion of loan commitments, $504.0 million of standby letters of credit, $1.2 billion of commercial letters of credit, and $122.6 million of expected tax-credit purchase commitments for the remainder of 2022; commitments may not be fully drawn.
Interest-rate simulations showed potential sensitivity depends substantially on deposit behavior: the June 30 model estimated a 4.91% increase in net interest income in a 300-basis-point rising-rate scenario without modeled attrition, but a 4.01% decrease under the alternative attrition scenario. Management cautioned that actual deposit responses are uncertain. Other cited risks include regulation, competition, cybersecurity, COVID-19 effects and changes in economic conditions. The company reported no material change in its previously disclosed risk factors. Legal proceedings were described as arising in the normal course; loss amounts for some matters were not yet determinable. The company also disclosed a $106.7 million office-development agreement, with $71.8 million paid by quarter-end.
Important facts for investors to verify
- Whether deposit outflows persist and how deposit pricing, customer repurchase agreements and liquidity evolve as interest rates change.
- How the sharp unrealized securities losses affect reported equity and capital, and whether any securities sales or credit impairment become necessary.
- Whether loan growth, potential problem loans and restructured loans translate into higher delinquencies, charge-offs or future credit-loss provisions.
- Whether recurring net interest income and fee revenue can offset higher compensation, technology and other expenses as unusual securities gains and mortgage banking revenue fluctuate.
- Progress on the office development, LIBOR-linked loan transition targeted for late spring 2023, and funding needs associated with loan commitments and tax-credit purchases.