Chronicle Journal: Finance

Commerce Bancshares, Inc. Reports Third Quarter Earnings Per Share of $1.05

Commerce Bancshares, Inc. announced earnings of $1.05 per share for the three months ended September 30, 2021, compared to $1.06 per common share in the same quarter last year and $1.38 per share in the second quarter of 2021. Net income attributable to Commerce Bancshares, Inc. (net income) for the third quarter of 2021 amounted to $122.6 million, compared to $132.4 million in the third quarter of 2020 and $162.3 million in the prior quarter. For the quarter, the return on average assets was 1.40%, the return on average equity was 13.74% and the efficiency ratio was 59.9%.

For the nine months ended September 30, 2021, earnings per common share totaled $3.54 compared to $1.80 for the first nine months of 2020. Net income attributable to Commerce Bancshares, Inc. amounted to $415.9 million for the nine months ended September 30, 2021, compared to $224.2 million in the comparable period last year. Year to date, the return on average assets was 1.65%, and the return on average equity was 16.14%.

In announcing these results, John Kemper, Chief Executive Officer, said, “We are pleased to report solid earnings again this quarter, reflecting continued robust contributions from our fee-based businesses. Trust fees grew 20.1% compared to the same quarter last year and 5.8% compared to the prior quarter. Bank card and deposit account fees continued to rebound strongly from last year’s lows. Although loan demand has been somewhat limited, we did experience increases in construction and consumer loans this quarter and our Company remains well-positioned to benefit from a strengthening economy. Our portfolio of private equity investments also performed well, driving net investment securities gains of $13.1 million. Non-interest expense increased compared to the same quarter last year, as higher incentive compensation reflected our improved financial performance in 2021 and certain business expenses that declined precipitously during the pandemic are rebounding from lows set one year ago. Additionally, other expense was elevated during the quarter, reflecting non-recurring litigation settlement expenses. Compared to the previous quarter, average deposits grew $344.0 million, or 1.2%, while average loan balances declined $731.5 million, or 4.6% (average PPP loan balances declined $689.2 million). As of September 30, 2021, 84% percent of our PPP loan balances have been forgiven.”

Mr. Kemper continued, “Credit quality of the loan portfolio remains excellent. This quarter, net loan charge-offs totaled $3.7 million, compared to $699 thousand in the prior quarter and $7.6 million in the third quarter of 2020. The ratio of annualized net loan charge-offs to average loans was .10% in the current quarter, .02% in the prior quarter and .18% in the third quarter of last year. Net charge-offs on consumer card loans declined $2.2 million from the prior quarter, and net charge-offs on consumer loans remained low. Non-performing assets totaled $10.5 million and also remained at very low levels. At September 30, 2021, the allowance for credit losses on loans decreased to $162.8 million. Excluding Paycheck Protection Plan (PPP) loans, the allowance for credit losses on loans to total loans was 1.10% at September 30, 2021.”

Total assets at September 30, 2021 were $34.5 billion, total loans were $15.1 billion, and total deposits were $28.1 billion. During the quarter, the Company paid a cash dividend of $.263 per share, representing a 2.1% increase over the rate paid in the third quarter of 2020. The Company purchased 575,457 shares of its common stock this quarter.

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 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 Nine Months Ended

(Unaudited)

(Dollars in thousands, except per share data)

September 30,
2021

June 30,
2021

September 30,
2020

September 30,
2021

September 30,
2020

FINANCIAL SUMMARY

Net interest income

$214,037

$207,982

$215,962

$627,767

$620,084

Non-interest income

137,506

139,143

129,572

412,694

370,750

Total revenue

351,543

347,125

345,534

1,040,461

990,834

Investment securities gains (losses), net

13,108

16,804

16,155

39,765

(1,275)

Provision for credit losses

(7,385)

(45,655)

3,101

(59,272)

141,593

Non-interest expense

211,620

198,126

190,858

602,319

572,068

Income before taxes

160,416

211,458

167,730

537,179

275,898

Income taxes

34,662

45,209

34,375

111,947

54,209

Non-controlling interest (income) expense

3,193

3,923

907

9,373

(2,479)

Net income attributable to Commerce Bancshares, Inc.

122,561

162,326

132,448

415,859

224,168

Preferred stock dividends

7,466

11,966

Net income available to common shareholders

$122,561

$162,326

$124,982

$415,859

$212,202

Earnings per common share:

Net income — basic

$1.05

$1.38

$1.06

$3.55

$1.80

Net income — diluted

$1.05

$1.38

$1.06

$3.54

$1.80

Effective tax rate

22.05

%

21.78

%

20.61

%

21.21

%

19.47

%

Tax equivalent net interest income

$216,858

$211,060

$219,118

$636,692

$629,773

Average total interest earning assets (1)

$

33,306,752

$

32,556,658

$

29,352,970

$

32,388,139

$

27,419,514

Diluted wtd. average shares outstanding

116,077,229

116,450,430

116,444,157

116,365,204

116,609,592

RATIOS

Average loans to deposits (2)

54.44

%

57.78

%

66.23

%

57.91

%

69.12

%

Return on total average assets

1.40

1.93

1.71

1.65

1.04

Return on average common equity (3)

13.74

19.12

15.21

16.14

8.93

Non-interest income to total revenue

39.11

40.08

37.50

39.66

37.42

Efficiency ratio (4)

59.95

56.90

55.00

57.76

57.37

Net yield on interest earning assets

2.58

2.60

2.97

2.63

3.07

EQUITY SUMMARY

Cash dividends per common share

$.263

$.263

$.257

$.788

$.771

Cash dividends on common stock

$30,645

$30,760

$30,174

$92,204

$90,640

Cash dividends on preferred stock

$—

$—

$7,466

$—

$11,966

Book value per common share (5)

$30.01

$29.89

$28.23

Market value per common share (5)

$69.68

$74.56

$53.61

High market value per common share

$75.68

$81.19

$59.13

Low market value per common share

$64.90

$70.69

$50.50

Common shares outstanding (5)

116,332,177

116,893,573

117,109,209

Tangible common equity to tangible assets (6)

9.71

%

9.91

%

10.11

%

Tier I leverage ratio

9.31

%

9.36

%

9.39

%

OTHER QTD INFORMATION

Number of bank/ATM locations

292

295

308

Full-time equivalent employees

4,582

4,590

4,825

(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 2020.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended

For the Nine Months Ended

(Unaudited)

(In thousands, except per share data)

September 30,
2021

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

September 30,
2021

September 30,
2020

Interest income

$216,981

$211,133

$209,697

$214,726

$223,114

$637,811

$657,922

Interest expense

2,944

3,151

3,949

4,963

7,152

10,044

37,838

Net interest income

214,037

207,982

205,748

209,763

215,962

627,767

620,084

Provision for credit losses

(7,385)

(45,655)

(6,232)

(4,403)

3,101

(59,272)

141,593

Net interest income after credit losses

221,422

253,637

211,980

214,166

212,861

687,039

478,491

NON-INTEREST INCOME

Bank card transaction fees

42,815

42,608

37,695

39,979

37,873

123,118

111,818

Trust fees

48,950

46,257

44,127

41,961

40,769

139,334

118,676

Deposit account charges and other fees

25,161

23,988

22,575

24,164

23,107

71,724

69,063

Capital market fees

3,794

3,327

4,981

3,826

3,194

12,102

10,756

Consumer brokerage services

4,900

4,503

4,081

3,996

4,011

13,484

11,099

Loan fees and sales

6,842

7,446

10,184

9,031

9,769

24,472

17,653

Other

5,044

11,014

12,402

12,160

10,849

28,460

31,685

Total non-interest income

137,506

139,143

136,045

135,117

129,572

412,694

370,750

INVESTMENT SECURITIES GAINS (LOSSES), NET

13,108

16,804

9,853

12,307

16,155

39,765

(1,275)

NON-INTEREST EXPENSE

Salaries and employee benefits

132,824

130,751

129,033

129,983

127,308

392,608

383,004

Net occupancy

12,329

11,527

12,021

11,570

12,058

35,877

35,075

Equipment

4,440

4,605

4,353

4,526

4,737

13,398

14,313

Supplies and communication

4,530

4,033

4,125

4,193

4,141

12,688

13,226

Data processing and software

25,598

24,954

25,463

24,323

23,610

76,015

71,002

Marketing

5,623

5,680

5,158

5,028

4,926

16,461

14,706

Other

26,276

16,576

12,420

16,687

14,078

55,272

40,742

Total non-interest expense

211,620

198,126

192,573

196,310

190,858

602,319

572,068

Income before income taxes

160,416

211,458

165,305

165,280

167,730

537,179

275,898

Less income taxes

34,662

45,209

32,076

33,084

34,375

111,947

54,209

Net income

125,754

166,249

133,229

132,196

133,355

425,232

221,689

Less non-controlling interest expense (income)

3,193

3,923

2,257

2,307

907

9,373

(2,479)

Net income attributable to Commerce Bancshares, Inc.

122,561

162,326

130,972

129,889

132,448

415,859

224,168

Less preferred stock dividends

7,466

11,966

Net income available to common shareholders

$122,561

$162,326

$130,972

$129,889

$124,982

$415,859

$212,202

Net income per common share — basic

$1.05

$1.38

$1.12

$1.11

$1.06

$3.55

$1.80

Net income per common share — diluted

$1.05

$1.38

$1.11

$1.11

$1.06

$3.54

$1.80

OTHER INFORMATION

Return on total average assets

1.40

%

1.93

%

1.63

%

1.63

%

1.71

%

1.65

%

1.04

%

Return on average common equity (1)

13.74

19.12

15.69

15.49

15.21

16.14

8.93

Efficiency ratio (2)

59.95

56.90

56.37

56.68

55.00

57.76

57.37

Effective tax rate

22.05

21.78

19.67

20.30

20.61

21.21

19.47

Net yield on interest earning assets

2.58

2.60

2.71

2.80

2.97

2.63

3.07

Tax equivalent net interest income

$216,858

$211,060

$208,774

$213,017

$219,118

$636,692

$629,773

(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)

September 30,
2021

June 30,
2021

September 30,
2020

ASSETS

Loans

Business

$

5,277,850

$

5,803,760

$

6,683,413

Real estate — construction and land

1,257,836

1,103,661

1,009,729

Real estate — business

2,937,852

3,017,560

2,993,192

Real estate — personal

2,769,292

2,793,213

2,753,867

Consumer

2,049,559

2,049,166

2,006,360

Revolving home equity

281,442

283,568

324,203

Consumer credit card

569,976

586,358

647,893

Overdrafts

4,583

2,978

2,270

Total loans

15,148,390

15,640,264

16,420,927

Allowance for credit losses on loans

(162,775)

(172,395)

(236,360)

Net loans

14,985,615

15,467,869

16,184,567

Loans held for sale

16,043

23,697

39,483

Investment securities:

Available for sale debt securities

14,165,656

13,291,506

11,539,061

Trading debt securities

40,114

29,002

25,805

Equity securities

9,174

8,678

4,203

Other securities

184,450

176,439

122,532

Total investment securities

14,399,394

13,505,625

11,691,601

Federal funds sold

5,945

2,275

Securities purchased under agreements to resell

1,750,000

1,300,000

850,000

Interest earning deposits with banks

1,888,545

2,161,644

1,171,697

Cash and due from banks

344,460

358,122

357,616

Premises and equipment — net

377,476

371,989

377,853

Goodwill

138,921

138,921

138,921

Other intangible assets — net

14,458

14,148

7,183

Other assets

582,631

508,202

632,621

Total assets

$

34,497,543

$

33,856,162

$

31,453,817

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:

Non-interest bearing

$

11,622,855

$

11,085,286

$

10,727,827

Savings, interest checking and money market

14,907,654

14,654,696

12,983,505

Certificates of deposit of less than $100,000

452,432

478,838

556,870

Certificates of deposit of $100,000 and over

1,163,343

1,267,417

1,433,577

Total deposits

28,146,284

27,486,237

25,701,779

Federal funds purchased and securities sold under agreements to repurchase

2,253,753

2,318,228

1,653,064

Other borrowings

4,006

2,194

782

Other liabilities

602,279

555,673

791,928

Total liabilities

31,006,322

30,362,332

28,147,553

Stockholders’ equity:

Common stock

589,352

589,352

563,978

Capital surplus

2,427,544

2,424,157

2,140,410

Retained earnings

396,655

304,739

326,890

Treasury stock

(92,047)

(53,018)

(69,050)

Accumulated other comprehensive income

159,166

220,390

343,435

Total stockholders’ equity

3,480,670

3,485,620

3,305,663

Non-controlling interest

10,551

8,210

601

Total equity

3,491,221

3,493,830

3,306,264

Total liabilities and equity

$

34,497,543

$

33,856,162

$

31,453,817

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS

(Unaudited)

(In thousands)

For the Three Months Ended

September 30,
2021

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

ASSETS:

Loans:

Business

$

5,437,498

$

6,211,610

$

6,532,921

$

6,580,300

$

6,709,200

Real estate — construction and land

1,168,566

1,088,433

1,091,969

1,032,891

974,346

Real estate — business

2,982,847

3,014,955

3,022,979

3,029,799

2,989,652

Real estate — personal

2,775,638

2,804,388

2,826,112

2,778,462

2,722,300

Consumer

2,041,263

2,004,625

1,947,322

1,981,033

1,992,314

Revolving home equity

281,689

287,031

299,371

316,895

329,361

Consumer credit card

566,406

575,725

608,747

638,161

646,185

Overdrafts

5,110

3,735

3,546

3,762

2,689

Total loans

15,259,017

15,990,502

16,332,967

16,361,303

16,366,047

Allowance for credit losses on loans

(172,112)

(200,801)

(220,512)

(235,484)

(240,286)

Net loans

15,086,905

15,789,701

16,112,455

16,125,819

16,125,761

Loans held for sale

16,021

23,389

35,814

30,577

24,728

Investment securities:

U.S. government and federal agency obligations

727,566

719,849

725,367

774,640

770,361

Government-sponsored enterprise obligations

50,785

50,793

50,801

69,133

102,749

State and municipal obligations

2,039,942

1,966,673

1,958,637

1,967,408

1,767,526

Mortgage-backed securities

7,115,419

6,685,407

6,998,521

6,646,345

6,259,926

Asset-backed securities

3,028,076

2,653,928

2,085,491

1,819,467

1,520,988

Other debt securities

608,642

605,772

570,115

533,646

514,166

Unrealized gain on debt securities

230,058

197,124

283,511

329,477

368,154

Total available for sale debt securities

13,800,488

12,879,546

12,672,443

12,140,116

11,303,870

Trading debt securities

32,238

34,955

32,320

28,040

27,267

Equity securities

8,756

4,914

4,321

4,221

4,193

Other securities

183,397

156,984

154,030

130,145

120,253

Total investment securities

14,024,879

13,076,399

12,863,114

12,302,522

11,455,583

Federal funds sold

792

1,338

7

355

337

Securities purchased under agreements to resell

1,633,205

937,372

849,999

849,998

849,994

Interest earning deposits with banks

2,602,896

2,724,782

1,480,331

1,082,644

1,024,435

Other assets

1,261,277

1,258,989

1,308,105

1,291,907

1,389,683

Total assets

$

34,625,975

$

33,811,970

$

32,649,825

$

31,683,822

$

30,870,521

LIABILITIES AND EQUITY:

Non-interest bearing deposits

$

11,475,113

$

11,109,198

$

10,438,637

$

10,275,735

$

9,801,562

Savings

1,484,923

1,474,391

1,333,177

1,234,481

1,193,079

Interest checking and money market

13,343,180

13,283,481

12,970,629

12,198,928

11,731,494

Certificates of deposit of less than $100,000

464,367

491,446

516,728

542,212

573,207

Certificates of deposit of $100,000 and over

1,289,665

1,354,685

1,230,075

1,339,301

1,447,968

Total deposits

28,057,248

27,713,201

26,489,246

25,590,657

24,747,310

Borrowings:

Federal funds purchased and securities sold under agreements to repurchase

2,360,876

2,165,696

2,166,072

2,028,457

1,855,971

Other borrowings

347

978

831

1,013

1,225

Total borrowings

2,361,223

2,166,674

2,166,903

2,029,470

1,857,196

Other liabilities

667,786

527,401

608,212

727,569

899,890

Total liabilities

31,086,257

30,407,276

29,264,361

28,347,696

27,504,396

Equity

3,539,718

3,404,694

3,385,464

3,336,126

3,366,125

Total liabilities and equity

$

34,625,975

$

33,811,970

$

32,649,825

$

31,683,822

$

30,870,521

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES

(Unaudited)

For the Three Months Ended

September 30,
2021

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

ASSETS:

Loans:

Business (1)

3.43

%

3.15

%

3.09

%

3.01

%

2.95

%

Real estate — construction and land

3.51

3.56

3.54

3.72

3.74

Real estate — business

3.46

3.49

3.52

3.51

3.53

Real estate — personal

3.27

3.31

3.40

3.44

3.56

Consumer

3.71

3.84

4.02

4.07

4.19

Revolving home equity

3.46

3.43

3.38

3.37

3.29

Consumer credit card

11.29

11.22

10.97

11.60

11.40

Overdrafts

Total loans

3.74

3.65

3.66

3.69

3.69

Loans held for sale

4.63

4.20

3.44

3.54

4.25

Investment securities:

U.S. government and federal agency obligations

5.74

5.52

2.54

2.63

3.71

Government-sponsored enterprise obligations

2.30

2.33

2.36

2.23

2.17

State and municipal obligations (1)

2.35

2.41

2.46

2.44

2.53

Mortgage-backed securities

1.53

1.11

1.39

1.37

1.95

Asset-backed securities

1.08

1.25

1.39

1.59

1.90

Other debt securities

2.04

2.06

2.15

2.19

2.35

Total available for sale debt securities

1.80

1.64

1.67

1.70

2.18

Trading debt securities (1)

1.01

1.19

1.08

1.40

1.66

Equity securities (1)

23.92

43.10

49.56

50.71

47.15

Other securities (1)

7.46

11.90

5.26

10.03

6.74

Total investment securities

1.89

1.78

1.72

1.81

2.24

Federal funds sold

.50

.60

1.12

Securities purchased under agreements to resell

2.19

4.46

5.31

5.24

5.26

Interest earning deposits with banks

.15

.11

.10

.10

.10

Total interest earning assets

2.62

2.64

2.76

2.86

3.07

LIABILITIES AND EQUITY:

Interest bearing deposits:

Savings

.08

.08

.08

.09

.09

Interest checking and money market

.05

.05

.06

.07

.10

Certificates of deposit of less than $100,000

.18

.27

.37

.51

.71

Certificates of deposit of $100,000 and over

.14

.20

.35

.47

.69

Total interest bearing deposits

.06

.07

.09

.12

.18

Borrowings:

Federal funds purchased and securities sold under agreements to repurchase

.08

.06

.06

.06

.09

Other borrowings

1.14

.82

.98

Total borrowings

.08

.06

.06

.06

.09

Total interest bearing liabilities

.06

%

.07

%

.09

%

.11

%

.17

%

Net yield on interest earning assets

2.58

%

2.60

%

2.71

%

2.80

%

2.97

%

(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 Nine Months Ended

(Unaudited)

(In thousands, except per share data)

September 30,
2021

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

September 30,
2021

September 30,
2020

ALLOWANCE FOR CREDIT LOSSES ON LOANS

Balance at beginning of period

$172,395

$200,527

$220,834

$236,360

$240,744

$220,834

$160,682

Adoption of ASU 2016-13

(21,039)

Provision for credit losses on loans

(5,961)

(27,433)

(10,355)

(7,510)

3,200

(43,749)

123,559

Net charge-offs (recoveries):

Commercial portfolio:

Business

65

(4,909)

(4)

581

208

(4,848)

3,084

Real estate — construction and land

1

(2)

(1)

1

(1)

Real estate — business

(5

)

(85)

20

(7)

(13)

(70)

(40)

60

(4,994)

17

572

194

(4,917)

3,043

Personal banking portfolio:

Consumer credit card

2,908

5,155

8,981

5,975

7,263

17,044

20,004

Consumer

496

378

763

1,160

211

1,637

3,284

Overdraft

243

148

153

335

200

544

942

Real estate — personal

(26)

(16)

15

(18)

(198)

(27)

(273)

Revolving home equity

(22)

28

23

(8)

(86)

29

(158)

3,599

5,693

9,935

7,444

7,390

19,227

23,799

Total net loan charge-offs

3,659

699

9,952

8,016

7,584

14,310

26,842

Balance at end of period

$162,775

$172,395

$200,527

$220,834

$236,360

$162,775

$236,360

LIABILITY FOR UNFUNDED LENDING COMMITMENTS

$22,784

$24,208

$42,430

$38,307

$35,200

NET CHARGE-OFF RATIOS (1)

Commercial portfolio:

Business

%

(.32%)

%

.04

%

.01

%

(.11%)

.07

%

Real estate — construction and land

Real estate — business

(.01)

(.19)

.02

.01

(.06)

.04

Personal banking portfolio:

Consumer credit card

2.04

3.59

5.98

3.72

4.47

3.91

3.93

Consumer

.10

.08

.16

.23

.04

.11

.22

Overdraft

18.87

15.89

17.50

35.43

29.59

17.59

39.16

Real estate — personal

(.03)

(.01)

Revolving home equity

(.03)

.04

.03

(.01)

(.10)

.01

(.06)

.25

.40

.71

.52

.52

.45

.57

Total

.10

%

.02

%

.25

%

.19

%

.18

%

.12

%

.23

%

CREDIT QUALITY RATIOS

Non-performing assets to total loans

.07

%

.07

%

.14

%

.16

%

.25

%

Non-performing assets to total assets

.03

.03

.07

.08

.13

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

1.07

1.10

1.22

1.35

1.44

NON-PERFORMING ASSETS

Non-accrual loans:

Business

$8,293

$8,839

$20,215

$22,524

$37,295

Real estate — construction and land

1

Real estate — business

577

655

1,572

2,230

1,063

Real estate — personal

1,551

1,672

1,719

1,786

1,911

Total

10,421

11,166

23,506

26,540

40,270

Foreclosed real estate

115

229

208

93

57

Total non-performing assets

$10,536

$11,395

$23,714

$26,633

$40,327

Loans past due 90 days and still accruing interest

$10,496

$12,338

$21,512

$22,190

$14,436

(1)

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

(2)

Excluding PPP loans, the allowance for credit losses on loans to total loans was 1.10% and 1.17% as of September 30, 2021 and June 30, 2021, respectively.

COMMERCE BANCSHARES, INC.
Management Discussion of Third Quarter Results
September 30, 2021

For the quarter ended September 30, 2021, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $122.6 million, compared to $162.3 million in the previous quarter and $132.4 million in the same quarter last year. The decrease in net income compared to the previous quarter was primarily the result of an increase in the provision for credit losses, higher non-interest expense, and lower investment securities gains, partly offset by higher net interest income and lower income tax expense. Compared to the prior quarter, the provision for credit losses increased due to a smaller decrease in the estimate of the allowance for credit losses on loans and unfunded lending commitments and higher net loan charge-offs. The net yield on interest earning assets declined two basis points to 2.58%. Average loans declined $731.5 million compared to the previous quarter, while average available for sale debt securities grew $920.9 million, and average deposits increased $344.0 million. For the quarter, the return on average assets was 1.40%, the return on average common equity was 13.74%, and the efficiency ratio was 59.9%.

Balance Sheet Review

During the 3rd quarter of 2021, average loans totaled $15.3 billion, a decrease of $731.5 million from the prior quarter, and declined $1.1 billion, or 6.8%, from the same quarter last year. Period end loans decreased $491.9 million compared to the prior quarter. Compared to the previous quarter, average balances of business, business real estate and personal real estate loans declined $774.1 million (includes a decline of $689.2 million in Paycheck Protection Program (PPP) loan balances), $32.1 million and $28.7 million, respectively. This decline was partially offset by growth in construction and consumer loans of $80.1 million and $36.6 million, respectively. The period end balance of PPP loans decreased $546.4 million during the 3rd quarter of 2021 and totaled $307.9 million at September 30, 2021. As of September 30, 2021, 97% of round 1 and 35% of round 2 PPP loan balances have been forgiven. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $119.3 million, compared to $164.6 million in the prior quarter.

Total average available for sale debt securities increased $920.9 million over the previous quarter to $13.8 billion, at fair value. The increase in investment securities was mainly the result of growth in mortgage-backed and asset-backed securities. During the current quarter, purchases of securities totaled $1.8 billion with a weighted average yield of approximately 1.20%. Maturities and pay downs were $817.2 million, and there were no sales during the quarter. At September 30, 2021, the duration of the investment portfolio was 3.5 years, and maturities and pay downs of approximately $2.8 billion are expected to occur during the next 12 months.

Total average deposits increased $344.0 million this quarter compared to the previous quarter. The increase in deposits mostly resulted from growth in demand deposits of $365.9 million. Additionally, interest checking and money market deposits grew $59.7 million, while certificate of deposit balances declined $92.1 million. Compared to the previous quarter, total average commercial deposits grew $360.1 million. The average loans to deposits ratio was 54.4% in the current quarter and 57.8% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.4 billion in the 3rd quarter of 2021 and $2.2 billion in the prior quarter.

Net Interest Income

Net interest income in the 3rd quarter of 2021 amounted to $214.0 million, an increase of $6.1 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $5.8 million over the previous quarter to $216.9 million. The increase in net interest income was mainly due to higher income earned on investment securities, partly offset by lower interest earned on loans and securities purchased under agreements to resell. The net yield on earning assets (tax equivalent) decreased to 2.58%, compared to 2.60% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $1.7 million. This decrease was mostly a result of lower average business loan balances, partially offset by higher yields on business loans and higher average construction loan balances. The increase in the yield on business loans was driven primarily by an increase in the yield on PPP loans, which grew to 7.73% this quarter. Excluding PPP loans, the yield on business loans was 2.92% in the 3rd quarter of 2021 compared to 3.00% in the prior quarter. The average tax-equivalent yield on the loan portfolio increased nine basis points to 3.74% this quarter.

Interest income on investment securities (tax equivalent) increased $8.6 million over the previous quarter, due to both higher rates earned and average balances. Interest income earned on U.S. government and federal agency securities increased modestly, as inflation income from Treasury inflation-protected securities inflation income increased $591 thousand this quarter to $7.4 million. At September 30, 2021, the Company recorded a $5.0 million adjustment to premium amortization, which increased interest income this quarter to reflect moderately slower forward prepayment speed estimates on mortgage-backed securities. The yield on total investment securities was 1.89% in the current quarter, compared to 1.78% in the previous quarter.

The average rate paid on interest bearing deposits totaled .06% in the 3rd quarter of 2021, compared .07% in the prior quarter. Interest expense on deposits decreased $359 thousand this quarter compared to the previous quarter mainly due to lower rates paid on certificate of deposit accounts. The overall rate paid on interest bearing liabilities was .06% in the current quarter, compared to .07% in the prior quarter.

Non-Interest Income

In the 3rd quarter of 2021, total non-interest income amounted to $137.5 million, an increase of $7.9 million, or 6.1%, compared to the same period last year and decreased $1.6 million compared to the prior quarter. The increase in non-interest income over the same period last year was mainly due to growth in trust fees, bank card fees, and deposit account fees, partially offset by lower loan fees and sales.

Total net bank card fees in the current quarter increased $4.9 million, or 13.0%, over the same period last year, and increased $207 thousand compared to the prior quarter. Net corporate card fees increased $3.1 million, or 15.3%, 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 $681 thousand, or 7.0%, mainly due to higher interchange fees. Net merchant income increased $651 thousand, or 14.3%, and net credit card fees increased $504 thousand, or 15.0%. Total net bank card fees this quarter were comprised of fees on corporate card ($23.3 million), debit card ($10.4 million), merchant ($5.2 million) and credit card ($3.9 million) transactions.

In the current quarter, trust fees increased $8.2 million, or 20.1%, over the same period last year, resulting mostly from higher private client fee income. Compared to the same period last year, deposit account fees increased $2.1 million, or 8.9%, mainly due to higher overdraft and return item fees and corporate cash management fees. Loan fees and sales, mostly mortgage banking revenue, declined $2.9 million, or 30.0%, over amounts recorded in the same quarter last year. Consumer brokerage fees increased $889 thousand, or 22.2%, compared to the same quarter last year, mainly due to growth in annuity and advisory fees.

Other non-interest income decreased from the same period last year mainly due to lower cash sweep commissions and tax credit sales fees of $1.6 million and $1.1 million, respectively. Additionally, a $2.0 million loss was recorded this quarter on an equity method investment. For the 3rd quarter of 2021, non-interest income comprised 39.1% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded investment net gains of $13.1 million in the current quarter, compared to net gains of $16.8 million in the prior quarter and net gains of $16.2 million in the 3rd quarter of 2020. Net gains on investments in the current quarter primarily resulted from unrealized fair value gains of $13.0 million in the Company’s private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $211.6 million, compared to $190.9 million in the same period last year and $198.1 million in the prior quarter. The increase in non-interest expense compared to the same period last year and the prior quarter was mainly due to litigation settlement expense, higher salaries and benefits expense and data processing and software expense.

Compared to the 3rd quarter of last year, salaries and employee benefits expense increased $5.5 million, mostly due to higher incentive compensation. Full-time equivalent employees totaled 4,582 and 4,825 at September 30, 2021 and 2020, respectively.

Data processing and software expense increased $2.0 million due to higher bank card processing fees and increased costs for service providers. Other non-interest expense increased mainly due to $8.2 million in litigation settlement costs. Additionally, legal and professional fees and travel and entertainment expense increased $1.3 million and $1.1 million, respectively.

Income Taxes

The effective tax rate for the Company was 22.0% in the current quarter, 21.8% in the previous quarter, and 20.6% in the 3rd quarter of 2020.

Credit Quality

Net loan charge-offs in the 3rd quarter of 2021 amounted to $3.7 million, compared to $699 thousand in the prior quarter and $7.6 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .10% in the current quarter, .02% in the previous quarter, and .18% in the 3rd quarter of last year. Net loan charge-offs on personal banking loans decreased $2.1 million to $3.6 million.

In the 3rd quarter of 2021, annualized net loan charge-offs on average consumer credit card loans were 2.04%, compared to 3.59% in the previous quarter, and 4.47% in the same quarter last year. Consumer loan net charge-offs were .10% of average consumer loans in the current quarter, .08% in the prior quarter and .04% in the same quarter last year.

During the 3rd quarter of 2021, the economy continued to recover from the pandemic and the economic forecast utilized in the allowance for credit loss model continued to improve. This improvement, coupled with other model inputs, resulted in a decrease in the allowance for credit losses as of September 30, 2021. At September 30, 2021, the allowance for credit losses on loans totaled $162.8 million, or 1.07% of total loans and 1.10% of total loans excluding PPP loans. Additionally, the liability for unfunded lending commitments at September 30, 2021 was $22.8 million, a decrease of $1.4 million from the liability at June 30, 2021.

At September 30, 2021, total non-performing assets amounted to $10.5 million, a decrease of $859 thousand from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($10.4 million and $115 thousand, respectively). At September 30, 2021, the balance of non-accrual loans, which represented .07% of loans outstanding, included business loans of $8.3 million, personal real estate loans of $1.6 million, and business real estate loans of $577 thousand. Loans more than 90 days past due and still accruing interest totaled $10.5 million at September 30, 2021.

Other

During the 3rd quarter of 2021, the Company paid a cash dividend of $.263 per common share, representing a 2.1% increase over the same period last year. The Company purchased 575,457 shares of treasury stock during the current quarter at an average price of $69.80.

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:

For additional information, contact
Matthew Burkemper, Investor Relations
at 8000 Forsyth, Mailstop: CBIR-1
Clayton, MO 63105
or by telephone at (314) 746-7485
Web Site: http://www.commercebank.com
Email: matthew.burkemper@commercebank.com

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