Chronicle Journal: Finance

Commerce Bancshares, Inc. Reports Second Quarter Earnings Per Share of $.34

Commerce Bancshares, Inc.  (NASDAQ: CBSH) announced earnings of $.34 per common share for the three months ended June 30, 2020, compared to $.91 per share in the same quarter last year and $.44 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the second quarter of 2020 amounted to $39.9 million, compared to $108.0 million in the second quarter of 2019 and $51.9 million in the prior quarter. For the quarter, the return on average assets was .54%, the return on average common equity was 4.77% and the efficiency ratio was 58.1%.

For the six months ended June 30, 2020, earnings per common share totaled $.78 compared to $1.72 for the first six months of 2019. Net income attributable to Commerce Bancshares, Inc. amounted to $91.7 million for the six months ended June 30, 2020 compared to $205.1 million in the comparable period last year. Year to date, the return on average assets was .66% and the return on average common equity was 5.61%.

In announcing these results, John Kemper, Chief Executive Officer, said, “While uncertainty surrounding the U.S. economy continued throughout the second quarter, we are cautiously optimistic about its resilience and encouraged by the strength of our customers and communities. Businesses have begun to reopen and adapt to the evolving COVID-19 operating environment and customer spending is rebounding from its lows in the second quarter. Commerce has always been committed to standing by our customers in difficult times. As part of our commitment, we have suspended foreclosure proceedings, offered fee waivers, and mobilized many internal resources to provide our commercial customers access to funding through the Paycheck Protection Program (PPP). In addition to the pandemic, our country is grappling with new, jarring reminders of the work that needs to be done to create a more just and equitable society, with broadened access to the wealth-creating engine of our economy. Commerce is committed to doing its part to create the positive and enduring change that is needed. Our strong culture, industry-leading capital levels, and commitment to sound credit policy enable us to be a source of stability for our team members, customers and communities in this period of uncertainty."

Mr. Kemper continued, “While net income was lower this quarter, it was mainly impacted by additional reserves recorded for future loan losses. Excluding the provision for credit losses and securities losses, net income grew modestly over the first quarter. A slight increase in net interest income and lower expense more than offset the decline in fee income this quarter. Compared to the prior quarter, consumer and business spending declined significantly, which negatively impacted bank card revenue. The PPP loan program drove tremendous growth in business loans this quarter, overshadowing strong growth in personal real estate loans. We secured funding for 7,443 customers to receive $1.5 billion in PPP loans, with a median loan size of $34 thousand. The net interest margin declined 39 basis points this quarter, reflecting not only the significant decline in interest rates over the past quarter, but also the rapid growth in deposits during the current quarter, which substantially increased our low-yielding balances held at the Federal Reserve.”

Mr. Kemper continued, "This quarter net loan charge-offs totaled $8.4 million, compared to $10.9 million in the prior quarter and $11.3 million in the second quarter of 2019. The ratio of annualized net loan charge-offs to average loans was .21% in the current quarter, .30% in the prior quarter and .32% in the second quarter of last year. Net loan charge-offs on commercial loans totaled $3.2 million this quarter. Net loan charge-offs on personal banking loans decreased $6.1 million to $5.2 million, mostly the result of new payment relief programs, which lowered consumer credit card loan net charge-offs noticeably this quarter. Further, while net charge-offs were mostly uneventful this quarter, the provision for credit losses exceeded net loan charge-offs by $72.1 million, as the economic forecast utilized in our CECL model deteriorated significantly from our expectation at the end of the first quarter, driving a second consecutive quarter of substantial increases to our reserves.”

Total assets at June 30, 2020 were $30.5 billion, total loans were $16.4 billion, and total deposits were $24.5 billion. During the quarter, the Company paid a common cash dividend of $.27 per share, representing an 8.9% increase over the rate paid in 2019, and also paid an annualized 6% cash dividend on its preferred stock.

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 150 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, including management's discussion of second quarter results, is posted to the Company's web site at www.commercebank.com.

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)

June 30,
2020

March 31,
2020

June 30,
2019

June 30,
2020

June 30,
2019

FINANCIAL SUMMARY

Net interest income

$203,057

$201,065

$211,634

$404,122

$415,122

Non-interest income

117,515

123,663

127,259

241,178

248,499

Total revenue

320,572

324,728

338,893

645,300

663,621

Investment securities losses, net

(4,129)

(13,301)

(110)

(17,430)

(1,035)

Provision for credit losses

80,539

57,953

11,806

138,492

24,269

Non-interest expense

187,512

193,698

189,779

381,210

381,204

Income before taxes

48,392

59,776

137,198

108,168

257,113

Income taxes

9,661

10,173

28,899

19,834

51,759

Non-controlling interest (income) expense

(1,132)

(2,254)

328

(3,386)

245

Net income attributable to Commerce Bancshares, Inc.

39,863

51,857

107,971

91,720

205,109

Preferred stock dividends

2,250

2,250

2,250

4,500

4,500

Net income available to common shareholders

$37,613

$49,607

$105,721

$87,220

$200,609

Earnings per common share:

Net income — basic

$.34

$.44

$.91

$.78

$1.72

Net income — diluted

$.34

$.44

$.91

$.78

$1.72

Effective tax rate

19.51

%

16.40

%

21.11

%

17.78

%

20.15

%

Tax equivalent net interest income

$206,253

$204,402

$215,203

$410,655

$422,307

Average total interest earning assets (1)

$

28,193,312

$

24,691,014

$

23,939,495

$26,442,163

$

23,907,357

Diluted wtd. average shares outstanding

110,896,858

111,375,938

115,239,850

111,136,398

115,526,352

RATIOS

Average loans to deposits (2)

69.22

%

72.57

%

70.97

%

70.78

%

70.96

%

Return on total average assets

.54

0.80

1.73

.66

1.66

Return on average common equity (3)

4.77

6.48

14.46

5.61

14.06

Non-interest income to total revenue

36.66

38.08

37.55

37.37

37.45

Efficiency ratio (4)

58.10

59.17

55.88

58.64

57.29

Net yield on interest earning assets

2.94

3.33

3.61

3.12

3.56

EQUITY SUMMARY

Cash dividends per common share

$.270

$.270

$.248

$.540

$.496

Cash dividends on common stock

$30,174

$30,292

$28,682

$60,466

$57,540

Cash dividends on preferred stock

$2,250

$2,250

$2,250

$4,500

$4,500

Book value per common share (5)

$28.81

$27.86

$26.22

Market value per common share (5)

$59.47

$50.35

$56.82

High market value per common share

$69.77

$71.92

$59.01

Low market value per common share

$48.06

$45.51

$53.93

Common shares outstanding (5)

111,533,315

111,535,295

115,424,027

Tangible common equity to tangible assets (6)

10.12

%

11.13

%

11.25

%

Tier I leverage ratio

10.78

%

11.13

%

11.75

%

OTHER QTD INFORMATION

Number of bank/ATM locations

312

317

319

Full-time equivalent employees

4,856

4,854

4,857

 

(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 available to common shareholders divided by average total equity less preferred stock.

(4)

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

(5)

As of period end.

(6)

The tangible common equity ratio is calculated as stockholders’ equity reduced by preferred stock, 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 2019.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended

For the Six Months Ended

(Unaudited)
(In thousands, except per share data)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

Interest income

$213,323

$221,485

$226,665

$231,743

$238,412

$434,808

$466,277

Interest expense

10,266

20,420

24,006

28,231

26,778

30,686

51,155

Net interest income

203,057

201,065

202,659

203,512

211,634

404,122

415,122

Provision for credit losses

80,539

57,953

15,206

10,963

11,806

138,492

24,269

Net interest income after credit losses

122,518

143,112

187,453

192,549

199,828

265,630

390,853

NON-INTEREST INCOME

Bank card transaction fees

33,745

40,200

41,079

44,510

42,646

73,945

82,290

Trust fees

37,942

39,965

40,405

39,592

38,375

77,907

75,631

Deposit account charges and other fees

22,279

23,677

24,974

24,032

23,959

45,956

46,977

Capital market fees

3,772

3,790

2,536

1,787

1,944

7,562

3,823

Consumer brokerage services

3,011

4,077

4,139

4,030

3,888

7,088

7,635

Loan fees and sales

4,649

3,235

3,465

4,755

4,238

7,884

7,547

Other

12,117

8,719

26,863

14,037

12,209

20,836

24,596

Total non-interest income

117,515

123,663

143,461

132,743

127,259

241,178

248,499

INVESTMENT SECURITIES GAINS (LOSSES), NET

(4,129)

(13,301)

(248)

4,909

(110)

(17,430)

(1,035)

NON-INTEREST EXPENSE

Salaries and employee benefits

126,759

128,937

126,901

123,836

120,062

255,696

242,190

Net occupancy

11,269

11,748

12,218

12,293

11,145

23,017

22,646

Equipment

4,755

4,821

4,859

4,941

4,790

9,576

9,261

Supplies and communication

4,427

4,658

4,851

5,106

5,275

9,085

10,437

Data processing and software

23,837

23,555

23,934

23,457

23,248

47,392

45,508

Marketing

3,801

5,979

3,951

6,048

6,015

9,780

11,915

Other

12,664

14,000

18,460

15,339

19,244

26,664

39,247

Total non-interest expense

187,512

193,698

195,174

191,020

189,779

381,210

381,204

Income before income taxes

48,392

59,776

135,492

139,181

137,198

108,168

257,113

Less income taxes

9,661

10,173

28,214

29,101

28,899

19,834

51,759

Net income

38,731

49,603

107,278

110,080

108,299

88,334

205,354

Less non-controlling interest expense (income)

(1,132)

(2,254)

398

838

328

(3,386)

245

Net income attributable to Commerce Bancshares, Inc.

39,863

51,857

106,880

109,242

107,971

91,720

205,109

Less preferred stock dividends

2,250

2,250

2,250

2,250

2,250

4,500

4,500

Net income available to common shareholders

$37,613

$49,607

$104,630

$106,992

$105,721

$87,220

$200,609

Net income per common share — basic

$.34

$.44

$.94

$.93

$.91

$.78

$1.72

Net income per common share — diluted

$.34

$.44

$.93

$.93

$.91

$.78

$1.72

OTHER INFORMATION

Return on total average assets

.54

%

.80

%

1.65

%

1.72

%

1.73

%

.66

%

1.66

%

Return on average common equity (1)

4.77

6.48

13.90

14.21

14.46

5.61

14.06

Efficiency ratio (2)

58.10

59.17

56.29

56.66

55.88

58.64

57.29

Effective tax rate

19.51

16.40

20.88

21.04

21.11

17.78

20.15

Net yield on interest earning assets

2.94

3.33

3.36

3.43

3.61

3.12

3.56

Tax equivalent net interest income

$206,253

$204,402

$206,156

$206,958

$215,203

$410,655

$422,307

(1)

Annualized net income available to common shareholders divided by average total equity less preferred stock.

(2)

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - PERIOD END

(Unaudited)
(In thousands)

June 30,
2020

March 31,
2020

June 30,
2019

ASSETS

Loans

Business

$

6,858,217

$

5,773,865

$

5,257,682

Real estate — construction and land

932,022

873,402

909,784

Real estate — business

2,941,163

2,960,308

2,867,831

Real estate — personal

2,690,542

2,464,819

2,160,515

Consumer

1,966,707

1,941,787

1,927,623

Revolving home equity

334,627

349,735

357,406

Consumer credit card

666,597

706,753

776,333

Overdrafts

5,179

3,143

3,074

Total loans

16,395,054

15,073,812

14,260,248

Allowance for credit losses on loans

(240,744)

(171,653)

(161,182)

Net loans

16,154,310

14,902,159

14,099,066

Loans held for sale

12,785

6,214

20,067

Investment securities:

Available for sale debt securities

10,317,427

8,678,586

8,682,303

Trading debt securities

28,813

24,291

36,508

Equity securities

4,128

4,038

4,744

Other securities

117,761

155,074

130,038

Total investment securities

10,468,129

8,861,989

8,853,593

Federal funds sold and short-term securities purchased under agreements to resell

400

Long-term securities purchased under agreements to resell

850,000

850,000

700,000

Interest earning deposits with banks

1,404,968

474,156

492,318

Cash and due from banks

391,268

401,185

456,192

Premises and equipment — net

368,565

369,745

363,554

Goodwill

138,921

138,921

138,921

Other intangible assets — net

7,179

8,433

8,763

Other assets

699,996

779,815

639,700

Total assets

$

30,496,121

$

26,793,017

$

25,772,174

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:

Non-interest bearing

$

9,700,261

$

6,952,236

$

6,274,838

Savings, interest checking and money market

12,792,993

12,049,279

11,452,849

Certificates of deposit of less than $100,000

590,635

619,758

613,505

Certificates of deposit of $100,000 and over

1,443,078

1,154,590

1,488,416

Total deposits

24,526,967

20,775,863

19,829,608

Federal funds purchased and securities sold under agreements to repurchase

1,740,438

1,428,013

2,394,294

Other borrowings

1,475

756,461

4,510

Other liabilities

869,072

580,216

372,399

Total liabilities

27,137,952

23,540,553

22,600,811

Stockholders’ equity:

Preferred stock

144,784

144,784

144,784

Common stock

563,978

563,978

559,432

Capital surplus

2,136,874

2,133,623

2,077,491

Retained earnings

232,082

224,643

384,232

Treasury stock

(69,112)

(69,149)

(106,106)

Accumulated other comprehensive income

349,261

253,136

108,898

Total stockholders’ equity

3,357,867

3,251,015

3,168,731

Non-controlling interest

302

1,449

2,632

Total equity

3,358,169

3,252,464

3,171,363

Total liabilities and equity

$

30,496,121

$

26,793,017

$

25,772,174

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS

(Unaudited)
(In thousands)

For the Three Months Ended

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

ASSETS:

Loans:

Business

$

6,760,827

$

5,493,657

$

5,362,020

$

5,263,312

$

5,142,794

Real estate — construction and land

895,648

924,086

901,367

920,206

908,777

Real estate — business

2,962,076

2,853,632

2,820,189

2,883,379

2,868,503

Real estate — personal

2,582,484

2,390,716

2,283,530

2,175,156

2,135,048

Consumer

1,944,265

1,950,491

1,961,631

1,924,434

1,907,979

Revolving home equity

343,210

350,256

347,527

354,040

361,673

Consumer credit card

663,911

727,569

749,056

763,377

766,080

Overdrafts

2,912

4,044

18,322

9,240

4,889

Total loans

16,155,333

14,694,451

14,443,642

14,293,144

14,095,743

Allowance for credit losses on loans

(171,616)

(139,482)

(159,776)

(160,387)

(161,403)

Net loans

15,983,717

14,554,969

14,283,866

14,132,757

13,934,340

Loans held for sale

6,363

12,875

15,363

19,882

20,731

Investment securities:

U.S. government and federal agency obligations

776,240

802,556

826,702

825,544

843,974

Government-sponsored enterprise obligations

114,518

134,296

184,973

181,929

199,506

State and municipal obligations

1,285,427

1,222,595

1,207,584

1,172,259

1,222,008

Mortgage-backed securities

5,325,720

4,685,782

4,685,794

4,712,508

4,614,703

Asset-backed securities

1,342,518

1,182,556

1,258,297

1,297,685

1,412,452

Other debt securities

406,665

321,733

331,167

334,218

331,459

Unrealized gain (loss) on debt securities

281,457

191,275

149,591

152,706

42,009

Total available for sale debt securities

9,532,545

8,540,793

8,644,108

8,676,849

8,666,111

Trading debt securities

31,981

34,055

32,518

29,622

30,169

Equity securities

4,137

4,273

4,200

4,705

4,717

Other securities

139,250

144,096

141,501

134,896

130,433

Total investment securities

9,707,913

8,723,217

8,822,327

8,846,072

8,831,430

Federal funds sold and short-term securities purchased under agreements to resell

92

326

714

1,080

1,601

Long-term securities purchased under agreements to resell

850,000

850,000

849,986

713,030

700,000

Interest earning deposits with banks

1,755,068

601,420

390,134

226,582

331,999

Other assets

1,461,528

1,368,464

1,315,395

1,292,191

1,251,555

Total assets

$

29,764,681

$

26,111,271

$

25,677,785

$

25,231,594

$

25,071,656

LIABILITIES AND EQUITY:

Non-interest bearing deposits

$

8,843,408

$

6,615,108

$

6,552,862

$

6,290,036

$

6,335,620

Savings

1,111,397

952,709

924,282

924,581

929,974

Interest checking and money market

11,441,694

10,777,400

10,618,347

10,409,111

10,642,648

Certificates of deposit of less than $100,000

605,136

622,840

626,944

620,138

605,440

Certificates of deposit of $100,000 and over

1,346,069

1,299,443

1,434,309

1,503,805

1,378,402

Total deposits

23,347,704

20,267,500

20,156,744

19,747,671

19,892,084

Borrowings:

Federal funds purchased and securities sold under agreements to repurchase

1,991,971

1,990,051

1,836,982

1,884,939

1,793,526

Other borrowings

345,162

161,698

94,471

77,248

1,318

Total borrowings

2,337,133

2,151,749

1,931,453

1,962,187

1,794,844

Other liabilities

763,524

466,980

458,094

390,560

307,433

Total liabilities

26,448,361

22,886,229

22,546,291

22,100,418

21,994,361

Equity

3,316,320

3,225,042

3,131,494

3,131,176

3,077,295

Total liabilities and equity

$

29,764,681

$

26,111,271

$

25,677,785

$

25,231,594

$

25,071,656

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES

(Unaudited)

For the Three Months Ended

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

ASSETS:

Loans:

Business (1)

2.91

%

3.50

%

3.59

%

3.85

%

4.02

%

Real estate — construction and land

3.95

4.78

5.05

5.46

5.63

Real estate — business

3.71

4.16

4.22

4.42

4.60

Real estate — personal

3.69

3.83

3.85

3.91

3.97

Consumer

4.48

4.78

4.76

4.88

4.77

Revolving home equity

3.50

4.61

4.76

5.17

5.20

Consumer credit card

11.76

12.26

12.11

12.42

12.33

Overdrafts

Total loans

3.80

4.39

4.47

4.71

4.82

Loans held for sale

8.03

6.15

5.32

6.15

6.98

Investment securities:

U.S. government and federal agency obligations

.46

2.09

2.16

2.36

4.66

Government-sponsored enterprise obligations

3.51

4.19

2.17

2.69

2.32

State and municipal obligations (1)

2.97

3.11

3.05

3.14

3.18

Mortgage-backed securities

2.17

2.37

2.72

2.61

2.70

Asset-backed securities

2.25

2.63

2.62

2.80

2.79

Other debt securities

2.49

2.94

2.82

2.63

2.68

Total available for sale debt securities

2.18

2.54

2.69

2.69

2.97

Trading debt securities (1)

2.93

2.52

2.81

2.91

3.14

Equity securities (1)

48.42

46.78

49.40

35.67

35.97

Other securities (1)

4.36

5.31

6.58

6.19

6.69

Total investment securities

2.24

2.61

2.78

2.76

3.04

Federal funds sold and short-term securities purchased under agreements to resell

2.47

2.22

2.57

2.76

Long-term securities purchased under agreements to resell

5.08

3.53

2.26

2.01

2.11

Interest earning deposits with banks

.10

.86

1.61

2.17

2.40

Total interest earning assets

3.09

3.66

3.75

3.90

4.05

LIABILITIES AND EQUITY:

Interest bearing deposits:

Savings

.09

.11

.11

.11

.11

Interest checking and money market

.13

.30

.35

.38

.38

Certificates of deposit of less than $100,000

.93

1.15

1.16

1.11

1.01

Certificates of deposit of $100,000 and over

1.08

1.62

1.79

1.99

2.02

Total interest bearing deposits

.25

.45

.52

.58

.55

Borrowings:

Federal funds purchased and securities sold under agreements to repurchase

.12

.96

1.20

1.74

1.80

Other borrowings

.82

.82

2.05

2.33

1.52

Total borrowings

.22

.95

1.25

1.76

1.80

Total interest bearing liabilities

.25

%

.52

%

.61

%

.73

%

.70

%

Net yield on interest earning assets

2.94

%

3.33

%

3.36

%

3.43

%

3.61

%

(1) Stated on a tax 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 per share data)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

ALLOWANCE FOR CREDIT LOSSES ON LOANS

Balance at beginning of period

$

171,653

$

160,682

$

160,682

$

161,182

$

160,682

$

160,682

$

159,932

Adoption of ASU 2016-13

(21,039)

(21,039)

Provision for credit losses on loans

77,491

42,868

15,206

10,963

11,806

120,359

24,269

Net charge-offs (recoveries):

Commercial portfolio:

Business

3,249

(373)

3,036

335

284

2,876

731

Real estate — construction and land

(101)

(117)

Real estate — business

(6)

(21)

35

(44)

(14)

(27)

(51)

3,243

(394)

3,071

291

169

2,849

563

Personal banking portfolio:

Consumer credit card

3,584

9,157

8,829

8,568

9,066

12,741

18,024

Consumer

1,362

1,711

2,838

2,069

1,723

3,073

3,647

Overdraft

316

426

507

446

253

742

570

Real estate — personal

(71)

(4)

6

(30)

(21)

(75)

80

Revolving home equity

(34)

(38)

(45)

119

116

(72)

135

5,157

11,252

12,135

11,172

11,137

16,409

22,456

Total net loan charge-offs

8,400

10,858

15,206

11,463

11,306

19,258

23,019

Balance at end of period

$

240,744

$

171,653

$

160,682

$

160,682

$

161,182

$

240,744

$

161,182

LIABILITY FOR UNFUNDED LENDING COMMITMENTS

$

35,299

$

32,250

$

1,075

$

1,075

$

1,075

NET CHARGE-OFF RATIOS (1)

Commercial portfolio:

Business

.19

%

(.03

%)

.22

%

.03

%

.02

%

.09

%

.03

%

Real estate — construction and land

(.04)

(.03)

Real estate — business

(.01)

.12

(.02)

.13

.01

.01

.06

.01

Personal banking portfolio:

Consumer credit card

2.17

5.06

4.68

4.45

4.75

3.68

4.70

Consumer

.28

.35

.57

.43

.36

.32

.38

Overdraft

43.65

42.37

10.98

19.15

20.76

42.90

25.27

Real estate — personal

(.01)

(.01)

(.01)

.01

Revolving home equity

(.04)

(.04)

(.05)

.13

.13

(.04)

.07

.37

.83

.90

.85

.86

.60

.87

Total

.21

%

.30

%

.42

%

.32

%

.32

%

.25

%

.33

%

CREDIT QUALITY RATIOS

Non-performing assets to total loans

.14

%

.07

%

.07

%

.08

%

.08

%

Non-performing assets to total assets

.08

.04

.04

.05

.05

Allowance for credit losses on loans to total loans (2)

1.47

1.14

1.09

1.11

1.13

NON-PERFORMING ASSETS

Non-accrual loans:

Business

$

19,034

$

7,356

$

7,489

$

7,753

$

8,428

Real estate — construction and land

1

2

2

3

3

Real estate — business

1,921

1,532

1,030

2,359

950

Real estate — personal

1,679

1,743

1,699

1,618

1,752

Total

22,635

10,633

10,220

11,733

11,133

Foreclosed real estate

422

422

365

502

897

Total non-performing assets

$

23,057

$

11,055

$

10,585

$

12,235

$

12,030

Loans past due 90 days and still accruing interest

$

24,583

$

16,520

$

19,859

$

16,308

$

16,532

(1)

As a percentage of average loans (excluding loans held for sale).

(2)

Excluding PPP loans, Allowance for credit losses on loans to total loans was 1.62% as of June 30, 2020.

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2020

For the quarter ended June 30, 2020, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $39.9 million, compared to $51.9 million in the previous quarter and $108.0 million in the same quarter last year. The decrease in net income from the previous quarter was primarily the result of an increase in the provision for credit losses. Non-interest income was lower this quarter than in the prior quarter, but non-interest expense also declined by a similar amount. Securities losses decreased this quarter mostly due to lower fair value adjustments on the Company’s private equity investment portfolio. While net interest income increased this quarter, the net interest margin decreased as the contraction of average rates on loans and investment securities was only modestly offset by the declining rate paid on interest bearing liabilities and growth in interest earning assets. Average loans increased $1.5 billion over the previous quarter, while average deposits increased $3.1 billion. For the quarter, the return on average assets was .54%, the return on average common equity was 4.77%, and the efficiency ratio was 58.1%.

Balance Sheet Review

During the 2nd quarter of 2020, average loans totaled $16.2 billion, and increased $1.5 billion over the prior quarter, and grew $2.1 billion, or 14.6%, over the same quarter last year. Period-end loans grew $1.3 billion over the prior quarter and $2.1 billion over June 30, 2019. Compared to the previous quarter, average loan growth was primarily driven by increases in business, personal real estate, and business real estate loans of $1.3 billion, $191.8 million, and $108.4 million, respectively. This growth was partly offset by a decline in consumer credit card loans of $63.7 million. Growth in business loans was the result of demand for Paycheck Protection Plan (PPP) loans, while personal real estate loan balances grew due to a higher portion of loans originated being retained rather than sold during the 2nd quarter of 2020 compared to the previous quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $832 thousand, compared to $39.3 million in the prior quarter, as late in the current quarter the Company resumed selling loans in the secondary market after temporarily pausing sales in the prior quarter.

Total average available for sale debt securities increased $991.8 million over the previous quarter to $9.5 billion, at fair value. The increase in investment securities was mainly the result of growth in mortgage-backed and asset-backed securities. Purchases of securities during the quarter totaled $2.3 billion, and sales, maturities and pay downs were $733.1 million. At June 30, 2020, the duration of the investment portfolio was 2.8 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits increased $3.1 billion this quarter compared to the previous quarter. The increase in deposits resulted from growth in demand ($2.2 billion), interest checking and money market ($664.3 million), savings deposits ($158.7 million), and certificates of deposit ($28.9 million). Compared to the previous quarter, total average commercial, consumer and wealth deposits (including private banking) grew $2.0 billion, $975.6 million and $161.3 million, respectively. The average loans to deposits ratio was 69.2% in the current quarter and 72.6% in the prior quarter. The Company’s average borrowings, which includes customer repurchase agreements, were $2.3 billion in the 2nd quarter of 2020 and $2.2 billion in the prior quarter.

Net Interest Income

Net interest income in the 2nd quarter of 2020 amounted to $203.1 million, an increase of $2.0 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $1.9 million over the previous quarter to $206.3 million. The increase in net interest income was mainly due to lower interest expense on interest bearing liabilities, partly offset by lower income on interest earnings assets. The Company recorded a $1.5 million adjustment to premium amortization on mortgage-backed securities for prepayment speed changes, which lowered interest income this quarter. The net yield on earning assets (tax equivalent) decreased to 2.94%, compared to 3.33% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $7.8 million, mostly as a result of lower yields on loans, mainly business and business real estate loans and lower average balances of consumer credit card loans. Growth in average business, personal real estate, and business real estate loan balances increased net interest income and partially offset the impact of lower yields. The average tax-equivalent yield on the loan portfolio declined to 3.80%, compared to 4.39% in the previous quarter.

Interest income on investment securities (tax equivalent) decreased $2.9 million from the previous quarter, mainly due to lower interest income earned on U.S. government and federal agency securities as inflation income on treasury inflation-protected securities declined $3.3 million this quarter. An increase in interest income from higher average balances of mortgage-backed securities was partly offset by the $1.5 million premium amortization adjustment, as noted above. The yield on total investment securities was 2.24% in the current quarter, down from 2.61% in the previous quarter.

Interest costs on deposits totaled 25 basis points in the 2nd quarter of 2020, compared to 45 basis points in the prior quarter. Interest expense on deposits decreased $6.3 million this quarter compared to the previous quarter mainly due to lower rates paid on all deposit categories. Borrowing costs decreased $3.8 million this quarter due to lower rates paid on borrowings, especially securities sold under agreements to repurchase, partially offset by higher average Federal Home Loan Bank borrowings, which were paid off as of June 30, 2020. The overall rate paid on interest bearing liabilities was .25% in the current quarter, compared to .52% in the prior quarter.

Non-Interest Income

In the 2nd quarter of 2020, total non-interest income amounted to $117.5 million, a decrease of $9.7 million, or 7.7%, compared to the same period last year and decreased $6.1 million, or 5.0%, compared to the prior quarter. The decrease in non-interest income from the same period last year was mainly due to lower bank card, deposit account, and consumer brokerage service fees, partly offset by growth in capital market fees.

Total net bank card fees in the current quarter decreased $8.9 million, or 20.9%, from the same period last year, and decreased $6.5 million, or 16.1%, compared to the prior quarter. Net corporate card fees decreased $5.8 million from the same quarter of last year mainly due to lower transaction volume. Net debit card fees decreased $1.2 million, or 11.7%, mainly due to lower interchange income. Net merchant income declined $1.0 million, or 19.5%, and net credit card fees decreased $965 thousand, or 24.9%, due to lower fee income. Total net bank card fees this quarter were comprised of fees on corporate card ($17.8 million), debit card ($8.8 million), merchant ($4.2 million) and credit card ($2.9 million) transactions.

In the current quarter, trust fees decreased $433 thousand, or 1.1%, from the same period last year, resulting from lower corporate and institutional trust revenue, partially offset by higher private client fee income. Compared to the same period last year, deposit account fees decreased $1.7 million, or 7.0%, mainly due to lower overdraft and return item fees, partly offset by an increase in corporate cash management fees. Additionally, capital market fees grew $1.8 million, or 94.0%, while consumer brokerage service fees decreased $877 thousand, or 22.6%, from amounts recorded in the same quarter last year.

Other non-interest income increased in the 2nd quarter of 2020 compared to the previous quarter mainly due to fair value adjustments to the Company’s deferred compensation plan assets that are held in a trust and are recorded as both an asset and a liability. Fair value equity adjustments on these assets affecting both other income and other expense increased $4.7 million over the previous quarter. For the 2nd quarter of 2020, non-interest income comprised 36.7% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities losses of $4.1 million in the current quarter, compared to losses of $13.3 million in the prior quarter and losses of $110 thousand in the 2nd quarter of 2019. Net securities losses in the current quarter primarily resulted from unrealized losses of $7.5 million in the Company’s private equity investment portfolio, as the economic conditions resulting from the COVID-19 pandemic continued to negatively impact investment valuations. The current quarter’s unrealized losses were partially offset by gains on sales of available for sale securities.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $187.5 million, compared to $189.8 million in the same period last year and $193.7 million in the prior quarter. The decrease in non-interest expense compared to the same period last year was mainly due to lower marketing and other non-interest expense. These decreases were partially offset by higher salaries and employee benefits expense.

Compared to the 2nd quarter of last year, salaries and employee benefits expense increased $6.7 million, or 5.6%, driven mainly by growth in full-time salary costs and higher incentive compensation expense. Full-time equivalent employees totaled 4,856 and 4,857 at June 30, 2020 and 2019, respectively.

For the current quarter compared to the same quarter of last year, marketing expense decreased $2.2 million, or 36.8%. Other non-interest expense decreased mainly due to higher deferred loan origination costs and lower travel and entertainment expense. These decreases to expense were partly offset by a $1.6 million increase in the Company’s deferred compensation liability, and a $795 thousand impairment on the Company’s mortgage servicing rights during the 2nd quarter of 2020. Supplies and communication expense decreased $848 thousand due to lower supplies, postage and bank card issuance expense.

Income Taxes

The effective tax rate for the Company was 19.5% in the current quarter, 16.4% in the previous quarter, and 21.1% in the 2nd quarter of 2019.

Credit Quality

Net loan charge-offs in the 2nd quarter of 2020 amounted to $8.4 million, compared to $10.9 million in the prior quarter and $11.3 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .21% in the current quarter, .30% in the previous quarter, and .32% in the 2nd quarter of last year. Compared to the prior quarter, net loan charge-offs on commercial loans increased $3.6 million to $3.2 million, while net loan charge-offs on personal banking loans decreased $6.1 million to $5.2 million.

In the 2nd quarter of 2020, annualized net loan charge-offs on average consumer credit card loans were 2.17%, compared to 5.06% in the previous quarter, and 4.75% in the same quarter last year. The reduction in net charge-offs during the 2nd quarter was mainly the result of a relief program that allowed consumer credit card customers to skip payments for up to two months. Consumer loan net charge-offs were .28% of average consumer loans in the current quarter, .35% in the prior quarter and .36% in the same quarter last year.

This quarter, the provision for credit losses on loans totaled $77.5 million and was $69.1 million higher than net loan charge-offs. The increase in the provision for credit losses on loans was driven by a significant deterioration of the economic forecast used in our CECL model as of June 30, 2020 due to the COVID-19 pandemic. At June 30, 2020, the allowance for credit losses on loans totaled $240.7 million, or 1.47% of total loans and 1.62% of total loans, excluding PPP loans. Additionally, the provision for credit losses on unfunded lending commitments increased $3.0 million. The liability for unfunded lending commitments at June 30, 2020 was $35.3 million.

At June 30, 2020, total non-performing assets amounted to $23.1 million, an increase of $12.2 million over the previous quarter, which was mostly related to a single energy loan. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($22.6 million and $422 thousand, respectively). At June 30, 2020, the balance of non-accrual loans, which represented .14% of loans outstanding, included business loans of $19.0 million, business real estate loans of $1.9 million, and personal real estate loans of $1.7 million. Loans more than 90 days past due and still accruing interest totaled $24.6 million at June 30, 2020.

Other

During the 2nd quarter of 2020, the Company paid a cash dividend of $.27 per common share, representing an 8.9% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock.

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.

Contacts:

Matthew Burkemper, Investor Relations
8000 Forsyth, Mailstop: CBIR-1
Clayton, MO 63105
Telephone: (314) 746-7485
Web Site: http://www.commercebank.com
Email: matthew.burkemper@commercebank.com

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