Commerce Bancshares, Inc. Reports First Quarter Earnings Per Share of $.97

Commerce Bancshares, Inc. announced earnings of $.97 per share for the three months ended March 31, 2022, compared to $1.06 per share in the same quarter last year and $.94 per share in the fourth quarter of 2021. Net income for the first quarter of 2022 amounted to $118.2 million, compared to $131.0 million in the first quarter of 2021 and $114.9 million in the prior quarter.

"Commerce had strong financial performance for the quarter, including an expanding net interest margin and increasing loan demand,” said John Kemper, Chief Executive Officer. “Loan demand increased across our commercial loan categories, reflecting higher seasonal business activity and good overall momentum in our markets."

“The increase in interest rates and the steepening of the yield curve provided opportunities to optimize the mix of earning assets on our balance sheet. While net interest income grew, non-interest income comprised 39% of total revenue, a reflection of our diversified business model."

First Quarter 2022 Financial Highlights:

• Net interest income was $208.8 million, a slight increase over the prior quarter. Net interest margin increased 2 basis points to 2.45%.

• Non-interest income totaled $131.8 million, a decrease of $15.9 million compared to the prior quarter.

• Net investment securities gains of $7.2 million were driven by net fair value gains of $7.5 million in the Company’s portfolio of private equity investments.

• Non-interest expense totaled $205.6 million, an increase of $2.1 million compared to the prior quarter.

• Average loan balances totaled $15.2 billion, an increase of $130.1 million, or .9%, over the prior quarter (average Paycheck Protection Program (PPP) loan balances declined $132.0 million).

• Total average available for sale debt securities increased 2.9%, or $418.0 million, over the prior quarter to $14.9 billion, at fair value. Purchases of securities during the quarter totaled $1.8 billion, with a weighted average yield of approximately 2.06%.

• Compared to the prior quarter, average deposits grew $501.7 million, or 1.7%. The average rate paid on interest bearing deposits was 5 basis points.

• The ratio of annualized net loan charge-offs to average loans was .12% compared to .11% in the prior quarter.

• Non-accrual loans totaled $8.3 million compared to $9.2 million in the prior quarter. Non-accrual loans were .05% of total loans.

• At March 31, 2022, the allowance for credit losses on loans decreased to $134.7 million. The allowance for credit losses on loans to total loans was .87% at March 31, 2022.

• The Company purchased 795,387 shares of its common stock this quarter at an average price of $70.22.

• Total assets at March 31, 2022 were $35.0 billion, a decrease of $1.7 billion, or 4.6%, from the prior quarter.

• For the quarter, the return on average assets was 1.33%, the return on average equity was 14.41%, and the efficiency ratio was 60.3%.

Commerce Bancshares, Inc. is a regional bank holding company offering a full line of banking services, including payment solutions, investment management and securities brokerage. Commerce Bank, a subsidiary of Commerce Bancshares, Inc., leverages more than 155 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.

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COMMERCE BANCSHARES, INC.

Management Discussion of First Quarter Results

March 31, 2022

For the quarter ended March 31, 2022, net income amounted to $118.2 million, compared to $114.9 million in the previous quarter and $131.0 million in the same quarter last year. The increase in net income compared to the previous quarter was primarily the result of net investment securities gains recorded this quarter compared to net losses recorded in the prior quarter, mostly offset by lower non-interest income. The net yield on interest earning assets grew two basis points to 2.45%. Average loans grew $130.1 million compared to the previous quarter, while average available for sale debt securities grew $418.0 million, and average deposits increased $501.7 million. For the quarter, the return on average assets was 1.33%, the return on average equity was 14.41%, and the efficiency ratio was 60.3%.

Balance Sheet Review

During the 1^st quarter of 2022, average loans totaled $15.2 billion, an increase of $130.1 million over the prior quarter, and declined $1.1 billion, or 6.8%, from the same quarter last year. Compared to the previous quarter, average balances of business loans grew $132.3 million (includes a decline of $132.0 million in Paycheck Protection Program (PPP) average loan balances). Average business real estate loan balances grew $91.6 million, while construction loan balances declined $93.3 million. Period end loans increased $282.7 million compared to the prior quarter, including PPP loan balances that decreased $75.7 million this quarter and totaled $53.4 million at March 31, 2022. Excluding PPP loans, period end business loans increased $280.7 million. As of March 31, 2022, 97% of PPP loan balances have been forgiven. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $55.6 million, compared to $119.3 million in the prior quarter.

Total average available for sale debt securities increased $418.0 million over the previous quarter to $14.9 billion, at fair value. The increase in investment securities was mainly the result of growth in asset-backed securities. During the current quarter, purchases of securities totaled $1.8 billion with a weighted average yield of approximately 2.06%. Maturities and pay downs were $806.5 million. At March 31, 2022, the duration of the investment portfolio was 3.6 years, and maturities and pay downs of approximately $3.1 billion are expected to occur during the next 12 months.

Total average deposits increased $501.7 million this quarter compared to the previous quarter. The increase in deposits mostly resulted from growth in interest checking and money market deposits of $1.1 billion, partially offset by lower demand deposits and certificates of deposit of $374.6 million and $255.3 million, respectively. Compared to the previous quarter, total average consumer and wealth deposits grew $290.2 million and $213.6 million, respectively. The average loans to deposits ratio was 51.9% in the current quarter and 52.4% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.7 billion in the 1^st quarter of 2022 and $2.6 billion in the prior quarter.

Net Interest Income

Net interest income in the 1^st quarter of 2022 amounted to $208.8 million, an increase of $1.1 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $969 thousand compared to the previous quarter to $211.4 million. The increase in net interest income was mainly due to higher income earned on investment securities, partially offset by lower income earned on loans and securities purchased under agreements to resell. The net yield on earning assets (tax equivalent) increased to 2.45%, compared to 2.43% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $4.8 million, mostly due to $4.0 million of lower income recognized from PPP loans this quarter, partly offset by higher average loan balances. Interest on construction and consumer card loans declined mostly due to lower average loan balances, while consumer banking loans declined mostly due to lower average rates. The yield on PPP loans decreased from 10.80% to 9.36% this quarter. Excluding PPP loans, the yield on business loans was 2.82% in the 1^st quarter of 2022 compared to 2.83% in the prior quarter. The average tax-equivalent yield on the loan portfolio decreased six basis points to 3.54% this quarter.

Interest income on investment securities (tax equivalent) increased $7.4 million compared to the prior quarter, due to higher rates earned coupled with higher average balances. At March 31, 2022, the Company recorded a $7.5 million adjustment to premium amortization compared to a $2.6 million adjustment in the prior quarter, which increased interest income to reflect considerably slower forward prepayment speed estimates on mortgage-backed securities. Interest income earned on U.S. government and federal agency securities increased due to higher average balances and rates earned, including the impact of $1.4 million in higher inflation income from Treasury inflation-protected securities. These increases were partly offset by $5.5 million in dividends received from private equity portfolio investments last quarter that did not reoccur. The yield on total investment securities was 1.97% in the current quarter, compared to 1.82% in the previous quarter.

The average rate paid on interest bearing deposits totaled .05% in both the current and prior quarters. Interest expense on deposits increased $25 thousand this quarter compared to the previous quarter. The overall rate paid on interest bearing liabilities was .06% in both the current and prior quarters.

Non-Interest Income

In the 1^st quarter of 2022, total non-interest income amounted to $131.8 million, a decrease of $4.3 million, or 3.1%, compared to the same period last year and decreased $15.9 million compared to the prior quarter. The decrease in non-interest income compared to the same period last year was mainly due to lower loan fees and sales and less income from branch sales, partly offset by higher bank card and trust fee income. The decrease in non-interest income compared to the prior quarter was mainly due to lower income from branch sales, deposit account, trust and bank card fees.

Total net bank card fees in the current quarter increased $4.4 million, or 11.5%, over the same period last year, and decreased $2.7 million compared to the prior quarter. Net corporate card fees increased $3.5 million, or 17.2%, over the same quarter of last year mainly due to higher interchange fee income, partly offset by higher rewards expense. Net debit card fees increased $185 thousand, or 2.0%, mainly due to higher interchange fees. Net merchant income increased $366 thousand, or 7.9%, and net credit card fees increased $300 thousand, or 8.8%. Total net bank card fees this quarter were comprised of fees on corporate card ($23.8 million), debit card ($9.6 million), merchant ($5.0 million) and credit card ($3.7 million) transactions.

In the current quarter, trust fees increased $3.7 million, or 8.3%, over the same period last year, resulting mostly from higher private client fee income. Compared to the same period last year, deposit account fees decreased $268 thousand, or 1.2%, mainly due to lower personal deposit account fees, partially offset by higher corporate cash management fees. Loan fees and sales, mostly mortgage banking revenue, declined $5.9 million, or 58.4%, compared to amounts recorded in the same quarter last year. Capital markets fees decreased $856 thousand, or 17.2%, while consumer brokerage fees increased $365 thousand, or 8.9%, compared to the same quarter last year.

Other non-interest income decreased from the same period last year mainly due to a $2.4 million gain on the sale of a branch location recorded last year compared to a $965 thousand write down on a branch location recorded this quarter. In addition, swap fees and cash sweep commissions declined $637 thousand and $403 thousand, respectively. Fair value adjustments on the Company’s deferred compensation plan assets, which are held in a trust and recorded as both an asset and liability, decreased $1.9 million from the same quarter last year, affecting both other income and other expense. For the 1^st quarter of 2022, non-interest income comprised 38.7% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded investment net gains of $7.2 million in the current quarter, compared to net losses of $9.7 million in the prior quarter and net gains of $9.9 million in the 1^st quarter of 2021. Net gains on investments in the current quarter primarily resulted from net fair value gains of $7.5 million in the Company’s private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $205.6 million, compared to $192.6 million in the same period last year and $203.6 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 benefits expense, data processing and software expense, marketing expense, and travel and entertainment expense. The increase in non-interest expense compared to the prior quarter was mainly due to higher payroll taxes and 401(k) contributions expense, partly offset by fair value adjustments on the Company’s deferred compensation plan and lower salaries expense.

Compared to the 1^st quarter of last year, salaries and employee benefits expense increased $6.9 million, mostly due to higher full-time salaries expense. Employee benefits expense also increased $2.5 million compared to the prior quarter. Full-time equivalent employees totaled 4,563 and 4,619 at March 31, 2022 and 2021, respectively.

Compared to the same period last year, data processing and software expense increased $1.6 million due to higher software amortization, bank card processing fees and increased costs for service providers this quarter. Marketing expense increased $1.2 million. Additionally, other non-interest expense increased $2.3 million, mainly due to an increase of $1.1 million in travel and entertainment expense and lower deferred origination costs of $1.1 million, partially offset by a $1.9 million deferred compensation adjustment previously mentioned.

Income Taxes

The effective tax rate for the Company was 21.3% in the current quarter, 22.7% in the previous quarter, and 19.7% in the 1^st quarter of 2021. The effective tax rate in the first quarter of 2022 is higher than the first quarter of 2021 mostly due to the executive compensation limitation on equity-based compensation.

Credit Quality

Net loan charge-offs in the 1^st quarter of 2022 amounted to $4.6 million, compared to $4.3 million in the prior quarter and $10.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .12% in the current quarter, .11% in the previous quarter, and .25% in the 1^st quarter of last year. Net loan charge-offs on personal banking loans increased $417 thousand to $4.6 million.

In the 1^st quarter of 2022, annualized net loan charge-offs on average consumer credit card loans were 2.53%, compared to 2.10% in the previous quarter, and 5.98% in the same quarter last year. Consumer loan net charge-offs were .16% of average consumer loans in the current quarter, .18% in the prior quarter and .16% in the same quarter last year.

During the 1^st quarter of 2022, the economy continued to recover from the pandemic and the economic forecast utilized in the allowance for credit loss model also continued to improve. This improvement, coupled with other model inputs, resulted in a decrease in the allowance for credit losses as of March 31, 2022, primarily in the consumer credit card portfolio as consumer credit continued to prove resistant to pandemic related hardships. At March 31, 2022, the allowance for credit losses on loans totaled $134.7 million, or .87% of total loans. Additionally, the liability for unfunded lending commitments at March 31, 2022 was $25.0 million, an increase of $828 thousand compared to the liability at December 31, 2021.

At March 31, 2022, total non-accrual loans amounted to $8.3 million, a decrease of $822 thousand from the previous quarter. At March 31, 2022, the balance of non-accrual loans, which represented .05% of loans outstanding, included business loans of $6.8 million, personal real estate loans of $1.4 million, and business real estate loans of $190 thousand. Loans more than 90 days past due and still accruing interest totaled $10.7 million at March 31, 2022.

Other

During the 1^st quarter of 2022, the Company paid a cash dividend of $.265 per common share, representing a 6.0% increase over the same period last year. The Company purchased 795,387 shares of treasury stock during the current quarter at an average price of $70.22.

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.

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