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

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

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

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

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

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

Second Quarter 2023 Financial Highlights:

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

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

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

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

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

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

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

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

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

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

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

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES FINANCIAL HIGHLIGHTS
		For the Three Months Ended						For the Six Months Ended
(Unaudited) (Dollars in thousands, except per share data)		Jun. 30, 2023		Mar. 31, 2023		Jun. 30, 2022		Jun. 30, 2023		Jun. 30, 2022
FINANCIAL SUMMARY
Net interest income		$249,538		$251,623		$232,385		$501,161		$441,171
Non-interest income		147,605		137,612		139,427		285,217		271,196
Total revenue		397,143		389,235		371,812		786,378		712,367
Investment securities gains (losses)		3,392		(306	)	1,029		3,086		8,192
Provision for credit losses		6,471		11,456		7,162		17,927		(2,696	)
Non-interest expense		227,611		224,107		213,505		451,718		419,153
Income before taxes		166,453		153,366		152,174		319,819		304,102
Income taxes		35,990		32,813		32,021		68,803		63,923
Non-controlling interest expense		2,674		1,101		4,359		3,775		6,231
Net income attributable to Commerce Bancshares, Inc.		$127,789		$119,452		$115,794		$247,241		$233,948
Earnings per common share:
Net income — basic		$1.03		$0.95		$0.92		$1.98		$1.84
Net income — diluted		$1.02		$0.95		$0.92		$1.97		$1.84
Effective tax rate		21.97	%	21.55	%	21.66	%	21.77	%	21.46	%
Fully-taxable equivalent net interest income		$251,757		$253,411		$235,010		$505,168		$446,403
Average total interest earning assets (1)		$32,412,084		$31,568,594		$33,839,655		$ 31,992,669		$34,385,339
Diluted wtd. average shares outstanding		124,007,300		124,258,981		125,916,229		124,132,445		126,279,546
RATIOS
Average loans to deposits (2)		66.15	%	64.99	%	53.93	%	65.57	%	52.91	%
Return on total average assets		1.56		1.54		1.36		1.55		1.35
Return on average equity (3)		18.81		18.75		16.29		18.78		15.28
Non-interest income to total revenue		37.17		35.35		37.50		36.27		38.07
Efficiency ratio (4)		57.22		57.49		57.29		57.35		58.72
Net yield on interest earning assets		3.12		3.26		2.79		3.18		2.62
EQUITY SUMMARY
Cash dividends per share		$.270		$.270		$.252		$.540		$.505
Cash dividends on common stock		$33,744		$33,759		$31,935		$67,503		$64,078
Book value per share (5)		$21.53		$21.51		$21.23
Market value per share (5)		$48.70		$58.35		$62.52
High market value per share		$58.97		$70.20		$70.78
Low market value per share		$45.55		$55.72		$59.81
Common shares outstanding (5)		124,734,830		124,720,710		126,034,333
Tangible common equity to tangible assets (6)		7.70	%	7.92	%	7.56	%
Tier I leverage ratio		10.46	%	10.61	%	9.45	%
OTHER QTD INFORMATION
Number of bank/ATM locations		272		275		279
Full-time equivalent employees		4,680		4,636		4,579

(1)	Excludes allowance for credit losses on loans and unrealized gains/(losses) on available for sale debt securities.
(2)	Includes loans held for sale.
(3)	Annualized net income attributable to Commerce Bancshares, Inc. divided by average total equity.
(4)	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of total revenue.
(5)	As of period end.
(6)	The tangible common equity ratio is a non-gaap ratio and is calculated as stockholders’ equity reduced by goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).
All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 2022.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share data)		For the Three Months Ended										For the Six Months Ended
		Jun. 30, 2023		Mar. 31, 2023		Dec. 31, 2022		Sep. 30, 2022		Jun. 30, 2022		Jun. 30, 2023		Jun. 30, 2022
Interest income		$348,663		$308,857		$286,377		$262,666		$238,154		$657,520		$449,936
Interest expense		99,125		57,234		31,736		16,293		5,769		156,359		8,765
Net interest income		249,538		251,623		254,641		246,373		232,385		501,161		441,171
Provision for credit losses		6,471		11,456		15,477		15,290		7,162		17,927		(2,696	)
Net interest income after credit losses		243,067		240,167		239,164		231,083		225,223		483,234		443,867
NON-INTEREST INCOME
Bank card transaction fees		49,725		46,654		44,588		45,638		43,873		96,379		85,918
Trust fees		47,265		45,328		44,710		45,406		46,792		92,593		94,603
Deposit account charges and other fees		22,633		21,752		21,989		24,521		25,564		44,385		47,871
Consumer brokerage services		4,677		5,085		4,518		5,085		5,068		9,762		9,514
Capital market fees		2,539		3,362		3,386		3,393		3,327		5,901		7,452
Loan fees and sales		2,735		2,589		2,566		3,094		3,246		5,324		7,481
Other		18,031		12,842		15,068		11,377		11,557		30,873		18,357
Total non-interest income		147,605		137,612		136,825		138,514		139,427		285,217		271,196
INVESTMENT SECURITIES GAINS (LOSSES), NET		3,392		(306	)	8,904		3,410		1,029		3,086		8,192
NON-INTEREST EXPENSE
Salaries and employee benefits		145,429		144,373		138,458		137,393		142,243		289,802		278,196
Data processing and software		28,719		28,154		27,991		28,050		27,635		56,873		54,651
Net occupancy		12,995		12,759		11,774		12,544		12,503		25,754		24,799
Marketing		6,368		5,471		5,419		6,228		5,836		11,839		12,180
Equipment		4,864		4,850		5,021		5,036		4,734		9,714		9,302
Supplies and communication		4,625		4,590		4,446		4,581		4,361		9,215		9,074
Other		24,611		23,910		23,631		19,052		16,193		48,521		30,951
Total non-interest expense		227,611		224,107		216,740		212,884		213,505		451,718		419,153
Income before income taxes		166,453		153,366		168,153		160,123		152,174		319,819		304,102
Less income taxes		35,990		32,813		34,499		33,936		32,021		68,803		63,923
Net income		130,463		120,553		133,654		126,187		120,153		251,016		240,179
Less non-controlling interest expense (income)		2,674		1,101		2,026		3,364		4,359		3,775		6,231
Net income attributable to Commerce Bancshares, Inc.		$127,789		$119,452		$131,628		$122,823		$115,794		$247,241		$233,948
Net income per common share — basic		$1.03		$0.95		$1.05		$0.97		$0.92		$1.98		$1.84
Net income per common share — diluted		$1.02		$0.95		$1.04		$0.97		$0.92		$1.97		$1.84
OTHER INFORMATION
Return on total average assets		1.56	%	1.54	%	1.65	%	1.48	%	1.36	%	1.55	%	1.35	%
Return on average equity (1)		18.81		18.75		21.88		17.84		16.29		18.78		15.28
Efficiency ratio (2)		57.22		57.49		55.26		55.19		57.29		57.35		58.72
Effective tax rate		21.97		21.55		20.77		21.65		21.66		21.77		21.46
Net yield on interest earning assets		3.12		3.26		3.18		3.01		2.79		3.18		2.62
Fully-taxable equivalent net interest income		$251,757		$253,411		$256,675		$248,737		$235,010		$505,168		$446,403

(1)	Annualized net income attributable to Commerce Bancshares, Inc. divided by average total equity.
(2)	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of total revenue.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - PERIOD END
(Unaudited) (In thousands)		Jun. 30, 2023		Mar. 31, 2023		Jun. 30, 2022
ASSETS
Loans
Business		$ 5,906,493		$ 5,704,467		$ 5,441,592
Real estate — construction and land		1,451,783		1,437,419		1,266,260
Real estate — business		3,621,222		3,486,543		3,215,578
Real estate — personal		2,980,599		2,952,042		2,836,835
Consumer		2,110,605		2,094,389		2,089,592
Revolving home equity		303,845		295,478		271,854
Consumer credit card		574,755		558,669		558,102
Overdrafts		7,237		6,515		6,814
Total loans		16,956,539		16,535,522		15,686,627
Allowance for credit losses on loans		(158,685	)	(159,317	)	(138,039	)
Net loans		16,797,854		16,376,205		15,548,588
Loans held for sale		6,776		6,162		6,467
Investment securities:
Available for sale debt securities		10,414,625		11,228,616		13,700,308
Trading debt securities		29,412		41,584		34,195
Equity securities		12,266		12,528		8,546
Other securities		258,045		268,417		207,989
Total investment securities		10,714,348		11,551,145		13,951,038
Federal funds sold		2,750		27,060		26,000
Securities purchased under agreements to resell		825,000		825,000		1,450,000
Interest earning deposits with banks		2,568,695		1,341,854		684,994
Cash and due from banks		366,699		351,210		355,524
Premises and equipment — net		451,568		428,169		397,877
Goodwill		146,371		138,921		138,921
Other intangible assets — net		14,666		14,918		15,853
Other assets		936,535		944,212		860,108
Total assets		$ 32,831,262		$ 32,004,856		$ 33,435,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$ 8,198,849		$ 8,685,234		$ 11,102,585
Savings, interest checking and money market		14,418,974		14,419,741		16,063,064
Certificates of deposit of less than $100,000		1,543,424		468,667		404,096
Certificates of deposit of $100,000 and over		1,708,197		1,109,818		601,488
Total deposits		25,869,444		24,683,460		28,171,233
Federal funds purchased and securities sold under agreements to repurchase		2,878,021		2,784,559		2,234,296
Other borrowings		1,005,613		1,507,776		6,025
Other liabilities		392,956		346,649		348,503
Total liabilities		30,146,034		29,322,444		30,760,057
Stockholders’ equity:
Common stock		629,319		629,319		610,804
Capital surplus		2,921,365		2,919,060		2,682,161
Retained earnings		211,358		117,313		262,363
Treasury stock		(58,389	)	(59,670	)	(129,588	)
Accumulated other comprehensive income (loss)		(1,036,295	)	(940,498	)	(766,894	)
Total stockholders’ equity		2,667,358		2,665,524		2,658,846
Non-controlling interest		17,870		16,888		16,467
Total equity		2,685,228		2,682,412		2,675,313
Total liabilities and equity		$ 32,831,262		$ 32,004,856		$ 33,435,370

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)	For the Three Months Ended
	Jun. 30, 2023		Mar. 31, 2023		Dec. 31, 2022		Sep. 30, 2022		Jun. 30, 2022
ASSETS:
Loans:
Business	$ 5,757,388		$ 5,656,104		$ 5,478,241		$ 5,317,696		$ 5,385,181
Real estate — construction and land	1,450,196		1,410,835		1,268,900		1,288,721		1,225,267
Real estate — business	3,540,851		3,478,382		3,300,697		3,258,128		3,163,508
Real estate — personal	2,960,962		2,933,750		2,886,686		2,844,376		2,825,578
Consumer	2,098,523		2,067,385		2,089,912		2,101,622		2,070,560
Revolving home equity	300,623		296,748		293,681		280,923		272,280
Consumer credit card	555,875		556,223		559,463		550,058		537,681
Overdrafts	4,630		4,449		7,428		4,438		5,524
Total loans	16,669,048		16,403,876		15,885,008		15,645,962		15,485,579
Allowance for credit losses on loans	(159,068	)	(150,117	)	(143,285	)	(137,833	)	(134,670	)
Net loans	16,509,980		16,253,759		15,741,723		15,508,129		15,350,909
Loans held for sale	5,957		5,708		6,567		7,170		7,933
Investment securities:
U.S. government and federal agency obligations	1,035,651		1,099,067		1,055,602		1,113,442		1,119,305
Government-sponsored enterprise obligations	55,751		87,086		55,732		55,753		55,762
State and municipal obligations	1,532,519		1,793,756		1,990,643		2,052,908		2,126,380
Mortgage-backed securities	6,316,224		6,454,408		6,605,936		6,847,912		7,158,252
Asset-backed securities	2,827,911		3,233,757		3,714,092		3,870,953		4,038,113
Other debt securities	519,988		528,941		560,951		587,026		643,463
Unrealized gain (loss) on debt securities	(1,331,002	)	(1,387,196	)	(1,582,061	)	(1,064,534	)	(851,110	)
Total available for sale debt securities	10,957,042		11,809,819		12,400,895		13,463,460		14,290,165
Trading debt securities	46,493		45,757		44,626		35,621		43,904
Equity securities	12,335		12,458		10,534		8,838		9,094
Other securities	273,587		229,867		219,354		208,708		195,090
Total investment securities	11,289,457		12,097,901		12,675,409		13,716,627		14,538,253
Federal funds sold	7,484		38,978		27,683		13,486		4,269
Securities purchased under agreements to resell	824,974		825,000		1,174,457		1,379,341		1,703,569
Interest earning deposits with banks	2,284,162		809,935		640,039		980,273		1,248,942
Other assets	1,941,340		1,376,551		1,339,554		1,256,498		1,238,493
Total assets	$ 32,863,354		$ 31,407,832		$ 31,605,432		$ 32,861,524		$ 34,092,368
LIABILITIES AND EQUITY:
Non-interest bearing deposits	$ 8,224,475		$ 9,114,512		$ 10,360,834		$ 10,758,353		$ 11,209,680
Savings	1,516,887		1,550,215		1,567,113		1,595,857		1,609,694
Interest checking and money market	12,918,399		13,265,485		13,693,974		14,423,713		14,847,306
Certificates of deposit of less than $100,000	1,075,110		415,367		388,304		397,071		411,655
Certificates of deposit of $100,000 and over	1,472,208		903,393		596,703		578,158		648,728
Total deposits	25,207,079		25,248,972		26,606,928		27,753,152		28,727,063
Borrowings:
Federal funds purchased	507,165		493,721		143,630		51,929		113,128
Securities sold under agreements to repurchase	2,206,612		2,418,726		2,260,263		2,199,866		2,258,184
Other borrowings	1,617,952		551,267		179,552		2,010		2,029
Total borrowings	4,331,729		3,463,714		2,583,445		2,253,805		2,373,341
Other liabilities	598,915		112,052		28,745		123,691		139,986
Total liabilities	30,137,723		28,824,738		29,219,118		30,130,648		31,240,390
Equity	2,725,631		2,583,094		2,386,314		2,730,876		2,851,978
Total liabilities and equity	$ 32,863,354		$ 31,407,832		$ 31,605,432		$ 32,861,524		$ 34,092,368

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE RATES
(Unaudited)	For the Three Months Ended
	Jun. 30, 2023		Mar. 31, 2023		Dec. 31, 2022		Sep. 30, 2022		Jun. 30, 2022
ASSETS:
Loans:
Business (1)	5.58	%	5.31	%	4.68	%	3.94	%	3.16	%
Real estate — construction and land	7.92		7.33		6.80		5.27		4.09
Real estate — business	5.96		5.65		5.15		4.40		3.70
Real estate — personal	3.68		3.61		3.45		3.36		3.27
Consumer	5.63		5.31		4.77		4.17		3.62
Revolving home equity	7.55		7.03		5.89		4.82		3.69
Consumer credit card	13.77		13.68		12.64		12.05		11.32
Overdrafts	—		—		—		—		—
Total loans	5.84		5.56		5.03		4.37		3.72
Loans held for sale	10.17		10.30		10.09		8.80		8.14
Investment securities:
U.S. government and federal agency obligations	3.42		1.90		2.01		4.51		4.93
Government-sponsored enterprise obligations	2.38		3.21		2.36		2.36		2.39
State and municipal obligations (1)	2.04		2.26		2.29		2.27		2.30
Mortgage-backed securities	2.09		2.06		1.88		1.93		1.99
Asset-backed securities	2.08		2.01		1.96		1.62		1.35
Other debt securities	1.86		1.93		1.89		1.93		1.97
Total available for sale debt securities	2.19		2.07		1.97		2.09		2.08
Trading debt securities (1)	4.53		4.59		3.81		2.74		2.46
Equity securities (1)	23.25		23.24		28.44		27.11		26.90
Other securities (1)	9.40		7.11		6.67		7.09		22.38
Total investment securities	2.37		2.18		2.07		2.18		2.36
Federal funds sold	5.63		5.09		4.27		2.77		1.79
Securities purchased under agreements to resell	1.99		1.94		2.36		1.72		1.03
Interest earning deposits with banks	5.14		4.67		3.69		2.25		.78
Total interest earning assets	4.34		4.00		3.59		3.21		2.86
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.05		.05		.06		.04		.04
Interest checking and money market	.93		.61		.38		.20		.06
Certificates of deposit of less than $100,000	3.78		1.39		.73		.41		.20
Certificates of deposit of $100,000 and over	3.93		2.98		1.42		.60		.29
Total interest bearing deposits	1.29		.71		.40		.21		.07
Borrowings:
Federal funds purchased	5.06		4.59		3.56		2.41		.79
Securities sold under agreements to repurchase	3.09		2.93		2.29		1.37		.48
Other borrowings	5.24		4.94		4.02		1.78		2.37
Total borrowings	4.13		3.49		2.48		1.39		.50
Total interest bearing liabilities	1.87	%	1.20	%	.69	%	.34	%	.12	%
Net yield on interest earning assets	3.12	%	3.26	%	3.18	%	3.01	%	2.79	%

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES CREDIT QUALITY
		For the Three Months Ended										For the Six Months Ended
(Unaudited) (In thousands, except ratios)		Jun. 30, 2023		Mar. 31, 2023		Dec. 31, 2022		Sep. 30, 2022		Jun. 30, 2022		Jun. 30, 2023		Jun. 30, 2022
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period		$159,317		$150,136		$143,377		$138,039		$134,710		$150,136		$150,044
Provision for credit losses on loans		5,864		15,948		12,404		10,150		7,287		21,812		(3,399	)
Net charge-offs (recoveries):
Commercial portfolio:
Business		165		230		496		461		19		395		96
Real estate — construction and land		(115	)	—		—		—		—		(115	)	—
Real estate — business		(5	)	(4	)	(4	)	(8	)	(1	)	(9	)	(8	)
		45		226		492		453		18		271		88
Personal banking portfolio:
Consumer credit card		4,687		4,325		3,467		2,882		2,937		9,012		6,309
Consumer		1,273		1,275		1,522		827		633		2,548		1,441
Overdraft		517		978		230		703		425		1,495		783
Real estate — personal		(6	)	(11	)	(40	)	(15	)	(41	)	(17	)	(19	)
Revolving home equity		(20	)	(26	)	(26	)	(38	)	(14	)	(46	)	4
		6,451		6,541		5,153		4,359		3,940		12,992		8,518
Total net loan charge-offs		6,496		6,767		5,645		4,812		3,958		13,263		8,606
Balance at end of period		$158,685		$159,317		$150,136		$143,377		$138,039		$158,685		$138,039
LIABILITY FOR UNFUNDED LENDING COMMITMENTS		$29,235		$28,628		$33,120		$30,047		$24,907
NET CHARGE-OFF RATIOS (1)
Commercial portfolio:
Business		.01	%	.02	%	.04	%	.03	%	—	%	.01	%	—	%
Real estate — construction and land		(.03	)	—		—		—		—		(.02	)	—
Real estate — business		—		—		—		—		—		—		—
		—		.01		.02		.02		—		.01		—
Personal banking portfolio:
Consumer credit card		3.38		3.15		2.46		2.08		2.19		3.27		2.36
Consumer		.24		.25		.29		.16		.12		.25		.14
Overdraft		44.79		89.15		12.28		62.85		30.86		66.40		29.50
Real estate — personal		—		—		(.01	)	—		(.01	)	—		—
Revolving home equity		(.03	)	(.04	)	(.04	)	(.05	)	(.02	)	(.03	)	—
		.44		.45		.35		.30		.28		.44		.30
Total		.16	%	.17	%	.14	%	.12	%	.10	%	.16	%	.11	%
CREDIT QUALITY RATIOS
Non-accrual loans to total loans		.04	%	.05	%	.05	%	.05	%	.05	%
Allowance for credit losses on loans to total loans		.94		.96		.92		.90		.88
NON-ACCRUAL AND PAST DUE LOANS
Non-accrual loans:
Business		$4,732		$6,361		$6,751		$5,645		$6,314
Real estate — construction and land		—		—		—		—		—
Real estate — business		153		171		189		149		167
Real estate — personal		1,276		1,269		1,366		1,390		1,436
Total		6,161		7,801		8,306		7,184		7,917
Loans past due 90 days and still accruing interest		$15,351		$14,800		$15,830		$12,538		$11,909

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

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

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

Balance Sheet Review

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

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

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

Net Interest Income

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

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

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

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

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

Non-Interest Income

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

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

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

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

Investment Securities Gains and Losses

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

Non-Interest Expense

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

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

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

Income Taxes

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

Credit Quality

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

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

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

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

Liquidity

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

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

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

Other

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

Forward Looking Information

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

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The Commerce Bancshares Stock at the time of publication of the news with a fall of -0,22 % to 45,70EUR on Lang & Schwarz stock exchange (19. Juli 2023, 12:04 Uhr).