Commerce Bancshares, Inc. Reports Second Quarter Earnings Per Share of $1.02

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KANSAS CITY, Mo., July 19, 2023--(BUSINESS WIRE)--Commerce Bancshares, Inc. announced earnings of $1.02 per share for the three months ended June 30, 2023, compared to $.92 per share in the same quarter last year and $.95 per share in the first quarter of 2023. Net income for the second quarter of 2023 amounted to $127.8 million, compared to $115.8 million in the second quarter of 2022 and $119.5 million in the prior quarter.

For the six months ended June 30, 2023, earnings per share totaled $1.97, compared to $1.84 for the first six months of 2022. Net income amounted to $247.2 million for the six months ended June 30, 2023, compared to $233.9 million in the comparable period last year. For the year to date, the return on average assets was 1.55%, and the return on average equity was 18.78%.

"Commerce delivered strong results in the second quarter," said John Kemper, President and Chief Executive Officer. "Against a backdrop of elevated interest rates, the Company produced record revenues, showing strength in both our net interest and non-interest income categories. These results reflect the ability of our diversified business model to perform across economic cycles. Our low loan-to-deposit ratio positioned us to meet loan demand across our footprint and provided opportunities for our teams to welcome new customer relationships."

On deposit balances, Kemper added, "Our customer deposits increased during the quarter, helping to accommodate loan growth. On top of this, the Company took steps to add short-term brokered deposit funding, increasing our liquidity cushion in the wake of the first quarter’s industry disruption. This short-term liquidity build impacted our net interest margin but was neutral to net interest income and reflects our conservative posture in times of economic uncertainty.

We are confident in our liquidity and capital levels, and credit performance remains excellent."

Second Quarter 2023 Financial Highlights:

  • Net interest income was $249.5 million, a $2.1 million decrease from the prior quarter. The net yield on interest earning assets decreased 14 basis points to 3.12%.

  • Non-interest income totaled $147.6 million, an increase of $8.2 million compared to the same quarter last year.

  • Non-interest expense totaled $227.6 million, an increase of $14.1 million compared to the same quarter last year.

  • Average loan balances totaled $16.7 billion, an increase of $265.2 million, or 1.6%, over the prior quarter.

  • Total average available for sale debt securities decreased 7.2%, or $852.8 million, from the prior quarter to $11.0 billion, at fair value. During the second quarter of 2023, the unrealized loss on available for sale securities increased $109.2 million to $1.4 billion, at period end.

  • Period end deposits increased $1.2 billion, or 4.8%, over March 31, 2023. The average rate paid on interest bearing deposits in the current quarter was 1.29%.

  • The ratio of annualized net loan charge-offs to average loans was .16% compared to .17% in the prior quarter.

  • The allowance for credit losses on loans decreased $632 thousand during the second quarter to $158.7 million, and at June 30, 2023, the ratio of the allowance for credit losses on loans to total loans was .94%, compared to .96% at March 31, 2023.

  • Total assets at June 30, 2023 were $32.8 billion, an increase of $826.4 million, or 2.6%, over the prior quarter.

  • For the quarter, the return on average assets was 1.56%, the return on average equity was 18.81%, and the efficiency ratio was 57.2%.

Commerce Bancshares, Inc. is a regional bank holding company offering a full line of banking services through its subsidiaries, including payment solutions, investment management and securities brokerage. One of its subsidiaries, Commerce Bank, leverages nearly 160 years of proven strength and experience to help individuals and businesses solve financial challenges. In addition to offering payment solutions across the U.S., Commerce Bank currently operates full-service banking facilities across the Midwest including the St. Louis and Kansas City metropolitan areas, Springfield, Central Missouri, Central Illinois, Wichita, Tulsa, Oklahoma City, and Denver. It also maintains commercial offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids. Commerce delivers high-touch service and sophisticated financial solutions at regional branches, commercial offices, ATMs, online, mobile and through a 24/7 customer service line.

This financial news release and the supplementary Earnings Highlights presentation are available on the Company’s website at https://investor.commercebank.com/news-info/financial-news-releases/default.aspx.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

FINANCIAL HIGHLIGHTS

For the Three Months Ended

For the Six Months Ended

(Unaudited)

(Dollars in thousands, except per share data)

Jun. 30,
2023

Mar. 31,
2023

Jun. 30,
2022

Jun. 30,
2023

Jun. 30,
2022

FINANCIAL SUMMARY

Net interest income

$249,538

$251,623

$232,385

$501,161

$441,171

Non-interest income

147,605

137,612

139,427

285,217

271,196

Total revenue

397,143

389,235

371,812

786,378

712,367

Investment securities gains (losses)

3,392

(306

)

1,029

3,086

8,192

Provision for credit losses

6,471

11,456

7,162

17,927

(2,696

)

Non-interest expense

227,611

224,107

213,505

451,718

419,153

Income before taxes

166,453

153,366

152,174

319,819

304,102

Income taxes

35,990

32,813

32,021

68,803

63,923

Non-controlling interest expense

2,674

1,101

4,359

3,775

6,231

Net income attributable to Commerce Bancshares, Inc.

$127,789

$119,452

$115,794

$247,241

$233,948

Earnings per common share:

Net income — basic

$1.03

$0.95

$0.92

$1.98

$1.84

Net income — diluted

$1.02

$0.95

$0.92

$1.97

$1.84

Effective tax rate

21.97

%

21.55

%

21.66

%

21.77

%

21.46

%

Fully-taxable equivalent net interest income

$251,757

$253,411

$235,010

$505,168

$446,403

Average total interest earning assets (1)

$32,412,084

$31,568,594

$33,839,655

$ 31,992,669

$34,385,339

Diluted wtd. average shares outstanding

124,007,300

124,258,981

125,916,229

124,132,445

126,279,546

RATIOS

Average loans to deposits (2)

66.15

%

64.99

%

53.93

%

65.57

%

52.91

%

Return on total average assets

1.56

1.54

1.36

1.55

1.35

Return on average equity (3)

18.81

18.75

16.29

18.78

15.28

Non-interest income to total revenue

37.17

35.35

37.50

36.27

38.07

Efficiency ratio (4)

57.22

57.49

57.29

57.35

58.72

Net yield on interest earning assets

3.12

3.26

2.79

3.18

2.62

EQUITY SUMMARY

Cash dividends per share

$.270

$.270

$.252

$.540

$.505

Cash dividends on common stock

$33,744

$33,759

$31,935

$67,503

$64,078

Book value per share (5)

$21.53

$21.51

$21.23

Market value per share (5)

$48.70

$58.35

$62.52

High market value per share

$58.97

$70.20

$70.78

Low market value per share

$45.55

$55.72

$59.81

Common shares outstanding (5)

124,734,830

124,720,710

126,034,333

Tangible common equity to tangible assets (6)

7.70

%

7.92

%

7.56

%

Tier I leverage ratio

10.46

%

10.61

%

9.45

%

OTHER QTD INFORMATION

Number of bank/ATM locations

272

275

279

Full-time equivalent employees

4,680

4,636

4,579

(1)

Excludes allowance for credit losses on loans and unrealized gains/(losses) on available for sale debt securities.

(2)

Includes loans held for sale.

(3)

Annualized net income attributable to Commerce Bancshares, Inc. divided by average total equity.

(4)

The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of total revenue.

(5)

As of period end.

(6)

The tangible common equity ratio is a non-gaap ratio and is calculated as stockholders’ equity reduced by goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 2022.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

For the Three Months Ended

For the Six Months Ended

Jun. 30,
2023

Mar. 31,
2023

Dec. 31,
2022

Sep. 30,
2022

Jun. 30,
2022

Jun. 30,
2023

Jun. 30,
2022

Interest income

$348,663

$308,857

$286,377

$262,666

$238,154

$657,520

$449,936

Interest expense

99,125

57,234

31,736

16,293

5,769

156,359

8,765

Net interest income

249,538

251,623

254,641

246,373

232,385

501,161

441,171

Provision for credit losses

6,471

11,456

15,477

15,290

7,162

17,927

(2,696

)

Net interest income after credit losses

243,067

240,167

239,164

231,083

225,223

483,234

443,867

NON-INTEREST INCOME

Bank card transaction fees

49,725

46,654

44,588

45,638

43,873

96,379

85,918

Trust fees

47,265

45,328

44,710

45,406

46,792

92,593

94,603

Deposit account charges and other fees

22,633

21,752

21,989

24,521

25,564

44,385

47,871

Consumer brokerage services

4,677

5,085

4,518

5,085

5,068

9,762

9,514

Capital market fees

2,539

3,362

3,386

3,393

3,327

5,901

7,452

Loan fees and sales

2,735

2,589

2,566

3,094

3,246

5,324

7,481

Other

18,031

12,842

15,068

11,377

11,557

30,873

18,357

Total non-interest income

147,605

137,612

136,825

138,514

139,427

285,217

271,196

INVESTMENT SECURITIES GAINS (LOSSES), NET

3,392

(306

)

8,904

3,410

1,029

3,086

8,192

NON-INTEREST EXPENSE

Salaries and employee benefits

145,429

144,373

138,458

137,393

142,243

289,802

278,196

Data processing and software

28,719

28,154

27,991

28,050

27,635

56,873

54,651

Net occupancy

12,995

12,759

11,774

12,544

12,503

25,754

24,799

Marketing

6,368

5,471

5,419

6,228

5,836

11,839

12,180

Equipment

4,864

4,850

5,021

5,036

4,734

9,714

9,302

Supplies and communication

4,625

4,590

4,446

4,581

4,361

9,215

9,074

Other

24,611

23,910

23,631

19,052

16,193

48,521

30,951

Total non-interest expense

227,611

224,107

216,740

212,884

213,505

451,718

419,153

Income before income taxes

166,453

153,366

168,153

160,123

152,174

319,819

304,102

Less income taxes

35,990

32,813

34,499

33,936

32,021

68,803

63,923

Net income

130,463

120,553

133,654

126,187

120,153

251,016

240,179

Less non-controlling interest expense (income)

2,674

1,101

2,026

3,364

4,359

3,775

6,231

Net income attributable to Commerce Bancshares, Inc.

$127,789

$119,452

$131,628

$122,823

$115,794

$247,241

$233,948

Net income per common share — basic

$1.03

$0.95

$1.05

$0.97

$0.92

$1.98

$1.84

Net income per common share — diluted

$1.02

$0.95

$1.04

$0.97

$0.92

$1.97

$1.84

OTHER INFORMATION

Return on total average assets

1.56

%

1.54

%

1.65

%

1.48

%

1.36

%

1.55

%

1.35

%

Return on average equity (1)

18.81

18.75

21.88

17.84

16.29

18.78

15.28

Efficiency ratio (2)

57.22

57.49

55.26

55.19

57.29

57.35

58.72

Effective tax rate

21.97

21.55

20.77

21.65

21.66

21.77

21.46

Net yield on interest earning assets

3.12

3.26

3.18

3.01

2.79

3.18

2.62

Fully-taxable equivalent net interest income

$251,757

$253,411

$256,675

$248,737

$235,010

$505,168

$446,403

(1)

Annualized net income attributable to Commerce Bancshares, Inc. divided by average total equity.

(2)

The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of total revenue.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - PERIOD END

(Unaudited)

(In thousands)

Jun. 30,
2023

Mar. 31,
2023

Jun. 30,
2022

ASSETS

Loans

Business

$ 5,906,493

$ 5,704,467

$ 5,441,592

Real estate — construction and land

1,451,783

1,437,419

1,266,260

Real estate — business

3,621,222

3,486,543

3,215,578

Real estate — personal

2,980,599

2,952,042

2,836,835

Consumer

2,110,605

2,094,389

2,089,592

Revolving home equity

303,845

295,478

271,854

Consumer credit card

574,755

558,669

558,102

Overdrafts

7,237

6,515

6,814

Total loans

16,956,539

16,535,522

15,686,627

Allowance for credit losses on loans

(158,685

)

(159,317

)

(138,039

)

Net loans

16,797,854

16,376,205

15,548,588

Loans held for sale

6,776

6,162

6,467

Investment securities:

Available for sale debt securities

10,414,625

11,228,616

13,700,308

Trading debt securities

29,412

41,584

34,195

Equity securities

12,266

12,528

8,546

Other securities

258,045

268,417

207,989

Total investment securities

10,714,348

11,551,145

13,951,038

Federal funds sold

2,750

27,060

26,000

Securities purchased under agreements to resell

825,000

825,000

1,450,000

Interest earning deposits with banks

2,568,695

1,341,854

684,994

Cash and due from banks

366,699

351,210

355,524

Premises and equipment — net

451,568

428,169

397,877

Goodwill

146,371

138,921

138,921

Other intangible assets — net

14,666

14,918

15,853

Other assets

936,535

944,212

860,108

Total assets

$ 32,831,262

$ 32,004,856

$ 33,435,370

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:

Non-interest bearing

$ 8,198,849

$ 8,685,234

$ 11,102,585

Savings, interest checking and money market

14,418,974

14,419,741

16,063,064

Certificates of deposit of less than $100,000

1,543,424

468,667

404,096

Certificates of deposit of $100,000 and over

1,708,197

1,109,818

601,488

Total deposits

25,869,444

24,683,460

28,171,233

Federal funds purchased and securities sold under agreements to repurchase

2,878,021

2,784,559

2,234,296

Other borrowings

1,005,613

1,507,776

6,025

Other liabilities

392,956

346,649

348,503

Total liabilities

30,146,034

29,322,444

30,760,057

Stockholders’ equity:

Common stock

629,319

629,319

610,804

Capital surplus

2,921,365

2,919,060

2,682,161

Retained earnings

211,358

117,313

262,363

Treasury stock

(58,389

)

(59,670

)

(129,588

)

Accumulated other comprehensive income (loss)

(1,036,295

)

(940,498

)

(766,894

)

Total stockholders’ equity

2,667,358

2,665,524

2,658,846

Non-controlling interest

17,870

16,888

16,467

Total equity

2,685,228

2,682,412

2,675,313

Total liabilities and equity

$ 32,831,262

$ 32,004,856

$ 33,435,370

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS

(Unaudited)

(In thousands)

For the Three Months Ended

Jun. 30,
2023

Mar. 31,
2023

Dec. 31,
2022

Sep. 30,
2022

Jun. 30,
2022

ASSETS:

Loans:

Business

$ 5,757,388

$ 5,656,104

$ 5,478,241

$ 5,317,696

$ 5,385,181

Real estate — construction and land

1,450,196

1,410,835

1,268,900

1,288,721

1,225,267

Real estate — business

3,540,851

3,478,382

3,300,697

3,258,128

3,163,508

Real estate — personal

2,960,962

2,933,750

2,886,686

2,844,376

2,825,578

Consumer

2,098,523

2,067,385

2,089,912

2,101,622

2,070,560

Revolving home equity

300,623

296,748

293,681

280,923

272,280

Consumer credit card

555,875

556,223

559,463

550,058

537,681

Overdrafts

4,630

4,449

7,428

4,438

5,524

Total loans

16,669,048

...

16,403,876

15,885,008

15,645,962

15,485,579

Allowance for credit losses on loans

(159,068

)

(150,117

)

(143,285

)

(137,833

)

(134,670

)

Net loans

16,509,980

16,253,759

15,741,723

15,508,129

15,350,909

Loans held for sale

5,957

5,708

6,567

7,170

7,933

Investment securities:

U.S. government and federal agency obligations

1,035,651

1,099,067

1,055,602

1,113,442

1,119,305

Government-sponsored enterprise obligations

55,751

87,086

55,732

55,753

55,762

State and municipal obligations

1,532,519

1,793,756

1,990,643

2,052,908

2,126,380

Mortgage-backed securities

6,316,224

6,454,408

6,605,936

6,847,912

7,158,252

Asset-backed securities

2,827,911

3,233,757

3,714,092

3,870,953

4,038,113

Other debt securities

519,988

528,941

560,951

587,026

643,463

Unrealized gain (loss) on debt securities

(1,331,002

)

(1,387,196

)

(1,582,061

)

(1,064,534

)

(851,110

)

Total available for sale debt securities

10,957,042

11,809,819

12,400,895

13,463,460

14,290,165

Trading debt securities

46,493

45,757

44,626

35,621

43,904

Equity securities

12,335

12,458

10,534

8,838

9,094

Other securities

273,587

229,867

219,354

208,708

195,090

Total investment securities

11,289,457

12,097,901

12,675,409

13,716,627

14,538,253

Federal funds sold

7,484

38,978

27,683

13,486

4,269

Securities purchased under agreements to resell

824,974

825,000

1,174,457

1,379,341

1,703,569

Interest earning deposits with banks

2,284,162

809,935

640,039

980,273

1,248,942

Other assets

1,941,340

1,376,551

1,339,554

1,256,498

1,238,493

Total assets

$ 32,863,354

$ 31,407,832

$ 31,605,432

$ 32,861,524

$ 34,092,368

LIABILITIES AND EQUITY:

Non-interest bearing deposits

$ 8,224,475

$ 9,114,512

$ 10,360,834

$ 10,758,353

$ 11,209,680

Savings

1,516,887

1,550,215

1,567,113

1,595,857

1,609,694

Interest checking and money market

12,918,399

13,265,485

13,693,974

14,423,713

14,847,306

Certificates of deposit of less than $100,000

1,075,110

415,367

388,304

397,071

411,655

Certificates of deposit of $100,000 and over

1,472,208

903,393

596,703

578,158

648,728

Total deposits

25,207,079

25,248,972

26,606,928

27,753,152

28,727,063

Borrowings:

Federal funds purchased

507,165

493,721

143,630

51,929

113,128

Securities sold under agreements to repurchase

2,206,612

2,418,726

2,260,263

2,199,866

2,258,184

Other borrowings

1,617,952

551,267

179,552

2,010

2,029

Total borrowings

4,331,729

3,463,714

2,583,445

2,253,805

2,373,341

Other liabilities

598,915

112,052

28,745

123,691

139,986

Total liabilities

30,137,723

28,824,738

29,219,118

30,130,648

31,240,390

Equity

2,725,631

2,583,094

2,386,314

2,730,876

2,851,978

Total liabilities and equity

$ 32,863,354

$ 31,407,832

$ 31,605,432

$ 32,861,524

$ 34,092,368

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES

(Unaudited)

For the Three Months Ended

Jun. 30,
2023

Mar. 31,
2023

Dec. 31,
2022

Sep. 30,
2022

Jun. 30,
2022

ASSETS:

Loans:

Business (1)

5.58

%

5.31

%

4.68

%

3.94

%

3.16

%

Real estate — construction and land

7.92

7.33

6.80

5.27

4.09

Real estate — business

5.96

5.65

5.15

4.40

3.70

Real estate — personal

3.68

3.61

3.45

3.36

3.27

Consumer

5.63

5.31

4.77

4.17

3.62

Revolving home equity

7.55

7.03

5.89

4.82

3.69

Consumer credit card

13.77

13.68

12.64

12.05

11.32

Overdrafts

—

—

—

—

—

Total loans

5.84

5.56

5.03

4.37

3.72

Loans held for sale

10.17

10.30

10.09

8.80

8.14

Investment securities:

U.S. government and federal agency obligations

3.42

1.90

2.01

4.51

4.93

Government-sponsored enterprise obligations

2.38

3.21

2.36

2.36

2.39

State and municipal obligations (1)

2.04

2.26

2.29

2.27

2.30

Mortgage-backed securities

2.09

2.06

1.88

1.93

1.99

Asset-backed securities

2.08

2.01

1.96

1.62

1.35

Other debt securities

1.86

1.93

1.89

1.93

1.97

Total available for sale debt securities

2.19

2.07

1.97

2.09

2.08

Trading debt securities (1)

4.53

4.59

3.81

2.74

2.46

Equity securities (1)

23.25

23.24

28.44

27.11

26.90

Other securities (1)

9.40

7.11

6.67

7.09

22.38

Total investment securities

2.37

2.18

2.07

2.18

2.36

Federal funds sold

5.63

5.09

4.27

2.77

1.79

Securities purchased under agreements to resell

1.99

1.94

2.36

1.72

1.03

Interest earning deposits with banks

5.14

4.67

3.69

2.25

.78

Total interest earning assets

4.34

4.00

3.59

3.21

2.86

LIABILITIES AND EQUITY:

Interest bearing deposits:

Savings

.05

.05

.06

.04

.04

Interest checking and money market

.93

.61

.38

.20

.06

Certificates of deposit of less than $100,000

3.78

1.39

.73

.41

.20

Certificates of deposit of $100,000 and over

3.93

2.98

1.42

.60

.29

Total interest bearing deposits

1.29

.71

.40

.21

.07

Borrowings:

Federal funds purchased

5.06

4.59

3.56

2.41

.79

Securities sold under agreements to repurchase

3.09

2.93

2.29

1.37

.48

Other borrowings

5.24

4.94

4.02

1.78

2.37

Total borrowings

4.13

3.49

2.48

1.39

.50

Total interest bearing liabilities

1.87

%

1.20

%

.69

%

.34

%

.12

%

Net yield on interest earning assets

3.12

%

3.26

%

3.18

%

3.01

%

2.79

%

(1)

Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CREDIT QUALITY

For the Three Months Ended

For the Six Months Ended

(Unaudited)

(In thousands, except ratios)

Jun. 30,
2023

Mar. 31,
2023

Dec. 31,
2022

Sep. 30,
2022

Jun. 30,
2022

Jun. 30,
2023

Jun. 30,
2022

ALLOWANCE FOR CREDIT LOSSES ON LOANS

Balance at beginning of period

$159,317

$150,136

$143,377

$138,039

$134,710

$150,136

$150,044

Provision for credit losses on loans

5,864

15,948

12,404

10,150

7,287

21,812

(3,399

)

Net charge-offs (recoveries):

Commercial portfolio:

Business

165

230

496

461

19

395

96

Real estate — construction and land

(115

)

—

—

—

—

(115

)

—

Real estate — business

(5

)

(4

)

(4

)

(8

)

(1

)

(9

)

(8

)

45

226

492

453

18

271

88

Personal banking portfolio:

Consumer credit card

4,687

4,325

3,467

2,882

2,937

9,012

6,309

Consumer

1,273

1,275

1,522

827

633

2,548

1,441

Overdraft

517

978

230

703

425

1,495

783

Real estate — personal

(6

)

(11

)

(40

)

(15

)

(41

)

(17

)

(19

)

Revolving home equity

(20

)

(26

)

(26

)

(38

)

(14

)

(46

)

4

6,451

6,541

5,153

4,359

3,940

12,992

8,518

Total net loan charge-offs

6,496

6,767

5,645

4,812

3,958

13,263

8,606

Balance at end of period

$158,685

$159,317

$150,136

$143,377

$138,039

$158,685

$138,039

LIABILITY FOR UNFUNDED LENDING COMMITMENTS

$29,235

$28,628

$33,120

$30,047

$24,907

NET CHARGE-OFF RATIOS (1)

Commercial portfolio:

Business

.01

%

.02

%

.04

%

.03

%

—

%

.01

%

—

%

Real estate — construction and land

(.03

)

—

—

—

—

(.02

)

—

Real estate — business

—

—

—

—

—

—

—

—

.01

.02

.02

—

.01

—

Personal banking portfolio:

Consumer credit card

3.38

3.15

2.46

2.08

2.19

3.27

2.36

Consumer

.24

.25

.29

.16

.12

.25

.14

Overdraft

44.79

89.15

12.28

62.85

30.86

66.40

29.50

Real estate — personal

—

—

(.01

)

—

(.01

)

—

—

Revolving home equity

(.03

)

(.04

)

(.04

)

(.05

)

(.02

)

(.03

)

—

.44

.45

.35

.30

.28

.44

.30

Total

.16

%

.17

%

.14

%

.12

%

.10

%

.16

%

.11

%

CREDIT QUALITY RATIOS

Non-accrual loans to total loans

.04

%

.05

%

.05

%

.05

%

.05

%

Allowance for credit losses on loans to total loans

.94

.96

.92

.90

.88

NON-ACCRUAL AND PAST DUE LOANS

Non-accrual loans:

Business

$4,732

$6,361

$6,751

$5,645

$6,314

Real estate — construction and land

—

—

—

—

—

Real estate — business

153

171

189

149

167

Real estate — personal

1,276

1,269

1,366

1,390

1,436

Total

6,161

7,801

8,306

7,184

7,917

Loans past due 90 days and still accruing interest

$15,351

$14,800

$15,830

$12,538

$11,909

(1)

Net charge-offs are annualized and calculated as a percentage of average loans (excluding loans held for sale).

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2023

For the quarter ended June 30, 2023, net income amounted to $127.8 million, compared to $119.5 million in the previous quarter and $115.8 million in the same quarter last year. The increase in net income compared to the previous quarter was primarily the result of higher non-interest income and investment securities gains coupled with a lower provision for credit losses, partly offset by lower net interest income and higher non-interest expense. The net yield on interest earning assets declined 14 basis points from the previous quarter to 3.12%. Average loans grew $265.2 million compared to the previous quarter, while average available for sale debt securities and average deposits declined $852.8 million and $41.9 million, respectively. For the quarter, the return on average assets was 1.56%, the return on average equity was 18.81%, and the efficiency ratio was 57.2%.

Balance Sheet Review

During the 2nd quarter of 2023, average loans totaled $16.7 billion, an increase of $265.2 million over the prior quarter, and $1.2 billion, or 7.6%, over the same quarter last year. Compared to the previous quarter, average balances of business, business real estate, and construction loans grew $101.3 million, $62.5 million, and $39.4 million, respectively. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $8.9 million, compared to $3.2 million in the prior quarter.

Total average available for sale debt securities decreased $852.8 million compared to the previous quarter to $11.0 billion, at fair value. The decrease in investment securities was mainly the result of lower balances of mortgage-backed, other asset-backed, and state and municipal securities. During the 2nd quarter of 2023, the unrealized loss on available for sale securities increased $109.2 million to $1.4 billion, at period end, and sales, maturities and pay downs were $702.3 million. At June 30, 2023, the duration of the available for sale investment portfolio was 3.9 years. The Company does not have any investment securities classified as held-to-maturity.

Total average deposits decreased $41.9 million this quarter compared to the previous quarter. The decrease in deposits mostly resulted from lower demand deposits and interest checking and money market deposits of $890.0 million and $347.1 million, respectively. These decreases were partly offset by higher certificate of deposit balances of $1.2 billion. Compared to the previous quarter, total average commercial, consumer, and wealth deposits declined $256.5 million, $189.5 million, and $123.4 million, respectively. These decreases were offset by $523.5 million of average brokered deposits, which are not reported in the Company’s operating segments. The average loans to deposits ratio was 66.2% in the current quarter and 65.0% in the prior quarter. The Company’s average borrowings, which included customer repurchase agreements of $2.2 billion, were $4.3 billion in the 2nd quarter of 2023 and $3.5 billion in the prior quarter.

Net Interest Income

Net interest income in the 2nd quarter of 2023 amounted to $249.5 million, a decrease of $2.1 million compared to the previous quarter. On a fully taxable-equivalent (FTE) basis, net interest income for the current quarter decreased $1.7 million from the previous quarter to $251.8 million. The decrease in net interest income was mostly due to higher interest expense, mostly offset by higher interest earned on loans and deposits with banks. The net yield (FTE) on earning assets decreased to 3.12%, from 3.26% in the prior quarter.

Compared to the previous quarter, interest income on loans (FTE) increased $17.6 million, due to higher average rates earned on all loan categories, coupled with higher average balances of all loan categories, except consumer credit cards. The average yield (FTE) on the loan portfolio increased 28 basis points to 5.84% this quarter.

Interest income on investment securities (FTE) increased $2.2 million compared to the prior quarter, due to higher rates earned, partly offset by lower average balances. Interest income earned on U.S. government and federal agency securities increased due to higher rates earned, which included the impact of $4.1 million in higher inflation income from Treasury inflation-protected securities this quarter. At June 30, 2023, the Company recorded a $1.7 million adjustment to premium amortization, which increased interest income to reflect slower forward prepayment speed estimates on mortgage-backed securities. The average yield (FTE) on total investment securities was 2.37% in the current quarter, compared to 2.18% in the previous quarter.

Compared to the previous quarter, interest income on deposits with banks increased $19.9 million, mostly due to higher average balances of $1.5 billion coupled with higher average rates earned. The average yield on deposits with banks was 5.14% in the current quarter, compared to 4.67% in the prior quarter.

Interest expense increased $41.1 million, mostly due to higher rates paid on deposits and higher Federal Home Loan Bank (FHLB) borrowings. The average rate paid on interest bearing deposits totaled 1.29% in the current quarter compared to .71% in the prior quarter. Interest expense on deposits increased $26.4 million this quarter compared to the previous quarter. Interest expense on borrowings increased $14.8 million, due to a 64 basis point increase in the average rate paid coupled with higher average borrowings of $868.0 million. The overall rate paid on interest bearing liabilities was 1.87% in the current quarter compared to 1.20% in the prior quarter.

Non-Interest Income

In the 2nd quarter of 2023, total non-interest income amounted to $147.6 million, an increase of $8.2 million compared to the same period last year and an increase of $10.0 million compared to the prior quarter. The increase in non-interest income compared to the same period last year was mainly due to higher bank card fees, letter of credit fees, and an increase in fair value adjustments recorded on the Company’s deferred compensation plan assets, which are held in a trust and recorded as both an asset and liability, affecting both other income and other expense. These increases were partly offset by lower deposit fees. The increase in non-interest income compared to the prior quarter was mainly due to higher bank card fees, letter of credit fees, trust fees, swap fees, and a gain on the sale of real estate recorded in the current quarter.

Total net bank card fees in the current quarter increased $5.9 million, or 13.3%, compared to the same period last year, and increased $3.1 million compared to the prior quarter. Net corporate card fees increased $4.5 million, or 18.3%, over the same quarter of last year mainly due to higher interchange fee income and lower rewards expense. Net debit card fees increased $807 thousand, or 7.7%, net merchant fees increased $425 thousand, or 8.6%, and net credit card fees increased $100 thousand, or 2.7%. Total net bank card fees this quarter were comprised of fees on corporate card ($29.2 million), debit card ($11.3 million), merchant ($5.4 million) and credit card ($3.8 million) transactions.

In the current quarter, trust fees increased $473 thousand, or 1.0%, over the same period last year, mostly resulting from higher private client trust fees. Compared to the same period last year, deposit account fees decreased $2.9 million, or 11.5%, mainly due to lower overdraft and return item fees of $2.9 million.

Other non-interest income increased over the same period last year primarily due to higher swap fees of $1.1 million, higher letter of credit fees of $2.7 million, a $3.4 million increase in the deferred compensation adjustment previously mentioned, and a gain on the sale of real estate of $1.1 million recorded in the current quarter. These increases were partly offset by a decrease in tax credit sales fees of $1.5 million and the receipt of a $2.2 million life insurance death benefit recorded in the 2nd quarter of 2022. For the 2nd quarter of 2023, non-interest income comprised 37.2% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities gains of $3.4 million in the current quarter, compared to losses of $306 thousand in the prior quarter and gains of $1.0 million in the 2nd quarter of 2022. Net securities gains in the current quarter primarily resulted from net fair value gains of $9.1 million on the Company’s private equity portfolio, partly offset by losses of $5.4 million realized on sales of available for sale debt securities.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $227.6 million, compared to $213.5 million in the same period last year and $224.1 million in the prior quarter. The increase in non-interest expense compared to the same period last year was mainly due to higher salaries and employee benefits expense, FDIC insurance expense, data processing and software expense, deconversion expense, travel and entertainment expense, and the deferred compensation adjustment previously mentioned. The increase in non-interest expense compared to the prior quarter was mainly due to higher full-time salaries expense, marketing expense, travel and entertainment expense and deconversion expense, partly offset by lower employee benefits expense and miscellaneous losses.

Compared to the 2nd quarter of last year, salaries and employee benefits expense increased $3.2 million, mostly due to higher full-time salaries expense of $6.9 million, or 7.6%. This increase was partly offset by lower incentive compensation of $5.7 million, largely the result of a $5.4 million accrual for special bonuses in 2022 that did not reoccur in 2023. Full-time equivalent employees totaled 4,680 and 4,579 at June 30, 2023 and 2022, respectively.

Compared to the same period last year, data processing and software expense increased $1.1 million due to higher bank card fees expense and increased costs for service providers. Other non-interest expense increased $8.4 million, mostly due to growth in deferred compensation, FDIC insurance, and travel and entertainment expense of $3.4 million, $1.8 million, and $797 thousand, respectively. Additionally, the Company recorded $2.1 million in deconversion expenses relating to the transition of Commerce Financial Advisors support to LPL Financial’s Institution Services platform.

Income Taxes

The effective tax rate for the Company was 22.0% in the current quarter, 21.6% in the previous quarter, and 21.7% in the 2nd quarter of 2022.

Credit Quality

Net loan charge-offs in the 2nd quarter of 2023 amounted to $6.5 million, compared to $6.8 million in the prior quarter and $4.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .16% in the current quarter, .17% in the previous quarter, and .10% in the 2nd quarter of last year. Net loan charge-offs on personal banking loans decreased $90 thousand to $6.5 million, mainly due to lower overdraft loan net charge-offs, partly offset by higher consumer credit card loan net charge-offs.

In the 2nd quarter of 2023, annualized net loan charge-offs on average consumer credit card loans were 3.38%, compared to 3.15% in the previous quarter, and 2.19% in the same quarter last year. Consumer loan net charge-offs were .24% of average consumer loans in the current quarter, .25% in the prior quarter, and .12% in the same quarter last year.

At June 30, 2023, the allowance for credit losses on loans totaled $158.7 million, or .94% of total loans, and decreased $632 thousand compared to the prior quarter. Additionally, the liability for unfunded lending commitments at June 30, 2023 was $29.2 million, an increase of $607 thousand compared to the liability at March 31, 2023.

At June 30, 2023, total non-accrual loans amounted to $6.2 million, a decrease of $1.6 million compared to the previous quarter. At June 30, 2023, the balance of non-accrual loans, which represented .04% of loans outstanding, included business loans of $4.7 million, personal real estate loans of $1.3 million, and business real estate loans of $153 thousand. Loans more than 90 days past due and still accruing interest totaled $15.4 million at June 30, 2023.

Liquidity

During the 2nd quarter of 2023, the Company increased its deposit balance at the Federal Reserve Bank (FRB) by $1.2 billion to $2.6 billion. The change in the balance at the FRB was mostly the result of a $1.2 billion increase in total deposits and $702.3 million of sales, maturities, and paydowns in the available for sale debt securities portfolio, partly offset by a $500.0 million decrease in FHLB advances, a $220.8 million decrease in net fed funds purchased, and growth of $421.0 million in loan balances.

The Company regularly pledges loans and securities to the FRB and at June 30, 2023, the Company’s pledging resulted in a total borrowing capacity of $5.0 billion, or an increase of $1.2 billion compared to March 31, 2023. The Company did not have any borrowings from the FRB’s Discount Window or the Bank Term Funding Program during the current quarter. The Company also pledges loans and securities and borrows from the FHLB. During the 2nd quarter of 2023, the Company reduced its outstanding borrowings from the FHLB by $500.0 million to $1.0 billion and had $1.1 billion of available borrowing capacity at June 30, 2023. Additionally, the Company pledges portions of its investment securities portfolio to secure public fund deposits, trust funds, and securities sold under agreements to repurchase.

The Company has an available for sale debt securities portfolio with a fair market value of $10.4 billion at June 30, 2023. Approximately $2.0 billion is expected to mature or pay down over the next 12 months. At June 30, 2023, the Company had pledged $8.1 billion of the securities portfolio. The Company also has a portfolio of $825.0 million in securities purchased under agreements to resell, of which $700.0 million are expected to mature over the next 12 months.

Other

During the 2nd quarter of 2023, the Company paid a cash dividend of $.27 per common share, representing a 7.1% increase over the same period last year. The Company purchased 6,205 shares of treasury stock during the current quarter at an average price of $52.61. Additionally, the Company completed its acquisition of L.J. Hart and Company, a municipal bond underwriter and advisor, in June 2023.

Forward Looking Information

This information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions, and other statements that are not historical facts. Such statements are based on current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

View source version on businesswire.com: https://www.businesswire.com/news/home/20230718212131/en/

Contacts

Matt Burkemper, Investor Relations
(314) 746-7485
www.commercebank.com
matthew.burkemper@commercebank.com

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