Commerce Bancshares, Inc. Reports Second Quarter Earnings Per Share of $.96

Commerce Bancshares, Inc. announced earnings of $.96 per share for the three months ended June 30, 2022, compared to $1.32 per share in the same quarter last year and $.97 per share in the first quarter of 2022. Net income for the second quarter of 2022 amounted to $115.8 million, compared to $162.3 million in the second quarter of 2021 and $118.2 million in the prior quarter.

For the six months ended June 30, 2022, earnings per share totaled $1.93, compared to $2.38 for the first six months of 2021. Net income amounted to $233.9 million for the six months ended June 30, 2022, compared to $293.3 million in the comparable period last year. For the year to date, the return on average assets was 1.35%, and the return on average equity was 15.28%.

“Against the backdrop of an uncertain economy, we are pleased with our second quarter performance,” said John Kemper, Chief Executive Officer. “Consumer and commercial spending remain at healthy levels, despite supply chain impacts, inflation, and geopolitical challenges. Our balance sheet has been well-positioned for rising rates, which resulted in an expansion in net interest margin this quarter.”

“Capital levels and credit quality metrics remain very strong and we have ample liquidity to meet the increased loan demand across our markets.”

Second Quarter 2022 Financial Highlights:

Net interest income was $232.4 million, a $23.6 million increase over the prior quarter. Net interest margin increased 34 basis points to 2.79%.

Non-interest income totaled $139.4 million, an increase of $7.7 million compared to the prior quarter.

Non-interest expense totaled $213.5 million, an increase of $7.9 million compared to the prior quarter.

Average loan balances totaled $15.5 billion, an increase of $262.4 million, or 1.7%, from the prior quarter.

Total average available for sale debt securities decreased 4.4%, or $654.6 million, over the prior quarter to $14.3 billion, at fair value. Purchases of securities during the quarter totaled $73.8 million, with a weighted average yield of approximately 3.03%.

Compared to the prior quarter, average deposits declined $622.5 million, or 2.1%. The average rate paid on interest bearing deposits was 7 basis points.

The ratio of annualized net loan charge-offs to average loans was .10% compared to .12% in the prior quarter.

Non-accrual loans totaled $7.9 million compared to $8.3 million in the prior quarter. Non-accrual loans were .05% of total loans.

At June 30, 2022, the allowance for credit losses on loans increased to $138.0 million and the ratio of allowance for credit losses on loans to total loans was .88%.

The Company purchased 846,223 shares of its common stock this quarter at an average price of $67.77.

Total assets at June 30, 2022 were $33.4 billion, a decrease of $1.6 billion, or 4.4%, from the prior quarter.

For the quarter, the return on average assets was 1.36%, the return on average equity was 16.29%, and the efficiency ratio was 57.3%.

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 more than 155 years of proven strength and experience to help individuals and businesses solve financial challenges. In addition to offering payment solutions across the U.S., Commerce Bank currently operates full-service banking facilities across the Midwest including the St. Louis and Kansas City metropolitan areas, Springfield, Central Missouri, Central Illinois, Wichita, Tulsa, Oklahoma City, and Denver. It also maintains commercial offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids. Commerce delivers high-touch service and sophisticated financial solutions at regional branches, commercial offices, ATMs, online, mobile and through a 24/7 customer service line.

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


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, 2022		Mar. 31, 2022		Jun. 30, 2021		Jun. 30, 2022		Jun. 30, 2021
FINANCIAL SUMMARY
Net interest income	$232,385		$208,786		$207,982		$441,171		$413,730
Non-interest income	139,427		131,769		139,143		271,196		275,188
Total revenue	371,812		340,555		347,125		712,367		688,918
Investment securities gains	1,029		7,163		16,804		8,192		26,657
Provision for credit losses	7,162		(9,858	)	(45,655	)	(2,696	)	(51,887	)
Non-interest expense	213,505		205,648		198,126		419,153		390,699
Income before taxes	152,174		151,928		211,458		304,102		376,763
Income taxes	32,021		31,902		45,209		63,923		77,285
Non-controlling interest expense	4,359		1,872		3,923		6,231		6,180
Net income attributable to Commerce Bancshares, Inc.	$115,794		$118,154		$162,326		$233,948		$293,298
Earnings per common share:
Net income — basic	$0.96		$0.97		$1.32		$1.93		$2.38
Net income — diluted	$0.96		$0.97		$1.32		$1.93		$2.38
Effective tax rate	21.66	%	21.26	%	21.78	%	21.46	%	20.85	%
Tax equivalent net interest income	$235,010		$211,393		$211,060		$446,403		$419,834
Average total interest earning assets ⁽¹⁾	$33,839,655		$34,937,086		$32,556,658		$ 34,385,339		$ 31,921,220
Diluted wtd. average shares outstanding	119,920,218		120,616,095		122,272,952		120,266,234		122,337,157

RATIOS
Average loans to deposits ⁽²⁾	53.93	%	51.90	%	57.78	%	52.91	%	59.73	%
Return on total average assets	1.36		1.33		1.93		1.35		1.78
Return on average equity⁽³⁾	16.29		14.41		19.12		15.28		17.42
Non-interest income to total revenue	37.50		38.69		40.08		38.07		39.94
Efficiency ratio ⁽⁴⁾	57.29		60.29		56.90		58.72		56.64
Net yield on interest earning assets	2.79		2.45		2.60		2.62		2.65

EQUITY SUMMARY
Cash dividends per share	$.265		$.265		$.250		$.530		$.500
Cash dividends on common stock	$31,935		$32,143		$30,760		$64,078		$61,559
Book value per share ⁽⁵⁾	$22.29		$24.60		$28.47
Market value per share ⁽⁵⁾	$65.65		$71.59		$71.01
High market value per share	$74.32		$74.72		$77.32
Low market value per share	$62.80		$66.28		$67.32
Common shares outstanding ⁽⁵⁾	120,032,698		120,881,120		122,738,252
Tangible common equity to tangible assets ⁽⁶⁾	7.56	%	8.09	%	9.91	%
Tier I leverage ratio	9.45	%	9.07	%	9.36	%

OTHER QTD INFORMATION
Number of bank/ATM locations	279		285		295
Full-time equivalent employees	4,579		4,563		4,590

(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 revenue.
(5)		As of period end.
(6)		The tangible common equity ratio 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 2021.

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
(Unaudited) (In thousands, except per share data)	Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021		Jun. 30, 2021		Jun. 30, 2022		Jun. 30, 2021
Interest income	$238,154		$211,782		$210,479		$216,981		$211,133		$449,936		$420,830
Interest expense	5,769		2,996		2,822		2,944		3,151		8,765		7,100
Net interest income	232,385		208,786		207,657		214,037		207,982		441,171		413,730
Provision for credit losses	7,162		(9,858	)	(7,054	)	(7,385	)	(45,655	)	(2,696	)	(51,887	)
Net interest income after credit losses	225,223		218,644		214,711		221,422		253,637		443,867		465,617
NON-INTEREST INCOME
Bank card transaction fees	43,873		42,045		44,773		42,815		42,608		85,918		80,303
Trust fees	46,792		47,811		48,893		48,950		46,257		94,603		90,384
Deposit account charges and other fees	25,564		22,307		25,493		25,161		23,988		47,871		46,563
Capital market fees	3,327		4,125		3,841		3,794		3,327		7,452		8,308
Consumer brokerage services	5,068		4,446		4,878		4,900		4,503		9,514		8,584
Loan fees and sales	3,246		4,235		5,248		6,842		7,446		7,481		17,630
Other	11,557		6,800		14,573		5,044		11,014		18,357		23,416
Total non-interest income	139,427		131,769		147,699		137,506		139,143		271,196		275,188
INVESTMENT SECURITIES GAINS (LOSSES), NET	1,029		7,163		(9,706	)	13,108		16,804		8,192		26,657
NON-INTEREST EXPENSE
Salaries and employee benefits	142,243		135,953		132,640		132,824		130,751		278,196		259,784
Net occupancy	12,503		12,296		12,308		12,329		11,527		24,799		23,548
Equipment	4,734		4,568		4,691		4,440		4,605		9,302		8,958
Supplies and communication	4,361		4,713		4,430		4,530		4,033		9,074		8,158
Data processing and software	27,635		27,016		25,777		25,598		24,954		54,651		50,417
Marketing	5,836		6,344		5,395		5,623		5,680		12,180		10,838
Other	16,193		14,758		18,341		26,276		16,576		30,951		28,996
Total non-interest expense	213,505		205,648		203,582		211,620		198,126		419,153		390,699
Income before income taxes	152,174		151,928		149,122		160,416		211,458		304,102		376,763
Less income taxes	32,021		31,902		33,764		34,662		45,209		63,923		77,285
Net income	120,153		120,026		115,358		125,754		166,249		240,179		299,478
Less non-controlling interest expense	4,359		1,872		452		3,193		3,923		6,231		6,180
Net income attributable to Commerce Bancshares, Inc.	$115,794		$118,154		$114,906		$122,561		$162,326		$233,948		$293,298
Net income per common share — basic	$0.96		$0.97		$0.94		$1.00		$1.32		$1.93		$2.38
Net income per common share — diluted	$0.96		$0.97		$0.94		$0.99		$1.32		$1.93		$2.38

OTHER INFORMATION
Return on total average assets	1.36	%	1.33	%	1.28	%	1.40	%	1.93	%	1.35	%	1.78	%
Return on average equity ⁽¹⁾	16.29		14.41		13.11		13.74		19.12		15.28		17.42
Efficiency ratio ⁽²⁾	57.29		60.29		57.29		59.95		56.90		58.72		56.64
Effective tax rate	21.66		21.26		22.71		22.05		21.78		21.46		20.85
Net yield on interest earning assets	2.79		2.45		2.43		2.58		2.60		2.62		2.65
Tax equivalent net interest income	$235,010		$211,393		$210,424		$216,858		$211,060		$446,403		$419,834

(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 revenue.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - PERIOD END

(Unaudited) (In thousands)	Jun. 30, 2022		Mar. 31, 2022		Jun. 30, 2021
ASSETS
Loans
Business	$ 5,441,592		$ 5,508,508		$ 5,803,760
Real estate — construction and land	1,266,260		1,144,411		1,103,661
Real estate — business	3,215,578		3,109,668		3,017,560
Real estate — personal	2,836,835		2,820,076		2,793,213
Consumer	2,089,592		2,053,160		2,049,166
Revolving home equity	271,854		264,401		283,568
Consumer credit card	558,102		544,579		586,358
Overdrafts	6,814		14,211		2,978
Total loans	15,686,627		15,459,014		15,640,264
Allowance for credit losses on loans	(138,039	)	(134,710	)	(172,395	)
Net loans	15,548,588		15,324,304		15,467,869
Loans held for sale	6,467		8,908		23,697
Investment securities:
Available for sale debt securities	13,700,308		14,780,494		13,291,506
Trading debt securities	34,195		31,380		29,002
Equity securities	8,546		9,284		8,678
Other securities	207,989		199,576		176,439
Total investment securities	13,951,038		15,020,734		13,505,625
Federal funds sold	26,000		—		5,945
Securities purchased under agreements to resell	1,450,000		1,825,000		1,300,000
Interest earning deposits with banks	684,994		1,260,813		2,161,644
Cash and due from banks	355,524		326,549		358,122
Premises and equipment — net	397,877		394,028		371,989
Goodwill	138,921		138,921		138,921
Other intangible assets — net	15,853		15,885		14,148
Other assets	860,108		671,651		508,202
Total assets	$ 33,435,370		$ 34,986,793		$ 33,856,162
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$ 11,102,585		$ 11,428,372		$ 11,085,286
Savings, interest checking and money market	16,063,064		16,751,632		14,654,696
Certificates of deposit of less than $100,000	404,096		422,992		478,838
Certificates of deposit of $100,000 and over	601,488		716,345		1,267,417
Total deposits	28,171,233		29,319,341		27,486,237
Federal funds purchased and securities sold under agreements to repurchase	2,234,296		2,317,461		2,318,228
Other borrowings	6,025		9,057		2,194
Other liabilities	348,503		367,532		555,673
Total liabilities	30,760,057		32,013,391		30,362,332
Stockholders’ equity:
Common stock	610,804		610,804		589,352
Capital surplus	2,682,161		2,678,025		2,424,157
Retained earnings	262,363		178,504		304,739
Treasury stock	(129,588	)	(72,293	)	(53,018	)
Accumulated other comprehensive income	(766,894	)	(434,400	)	220,390
Total stockholders’ equity	2,658,846		2,960,640		3,485,620
Non-controlling interest	16,467		12,762		8,210
Total equity	2,675,313		2,973,402		3,493,830
Total liabilities and equity	$ 33,435,370		$ 34,986,793		$ 33,856,162

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE BALANCE SHEETS

(Unaudited) (In thousands)	For the Three Months Ended
(Unaudited) (In thousands)	Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021		Jun. 30, 2021
ASSETS:
Loans:
Business	$ 5,385,181		$ 5,324,172		$ 5,191,844		$ 5,437,498		$ 6,211,610
Real estate — construction and land	1,225,267		1,134,902		1,228,237		1,168,566		1,088,433
Real estate — business	3,163,508		3,095,068		3,003,459		2,982,847		3,014,955
Real estate — personal	2,825,578		2,808,980		2,785,095		2,775,638		2,804,388
Consumer	2,070,560		2,040,200		2,043,690		2,041,263		2,004,625
Revolving home equity	272,280		273,859		276,464		281,689		287,031
Consumer credit card	537,681		540,844		559,429		566,406		575,725
Overdrafts	5,524		5,178		4,926		5,110		3,735
Total loans	15,485,579		15,223,203		15,093,144		15,259,017		15,990,502
Allowance for credit losses on loans	(134,670	)	(149,685	)	(162,428	)	(172,112	)	(200,801	)
Net loans	15,350,909		15,073,518		14,930,716		15,086,905		15,789,701
Loans held for sale	7,933		9,383		11,203		16,021		23,389
Investment securities:
U.S. government and federal agency obligations	1,119,305		1,103,749		1,009,025		727,566		719,849
Government-sponsored enterprise obligations	55,762		51,770		50,777		50,785		50,793
State and municipal obligations	2,126,380		2,077,600		2,095,517		2,039,942		1,966,673
Mortgage-backed securities	7,158,252		7,316,609		7,141,249		7,115,419		6,685,407
Asset-backed securities	4,038,113		3,933,061		3,514,541		3,028,076		2,653,928
Other debt securities	643,463		636,247		629,643		608,642		605,772
Unrealized gain (loss) on debt securities	(851,110	)	(174,297	)	86,020		230,058		197,124
Total available for sale debt securities	14,290,165		14,944,739		14,526,772		13,800,488		12,879,546
Trading debt securities	43,904		40,686		46,513		32,238		34,955
Equity securities	9,094		9,498		9,171		8,756		4,914
Other securities	195,090		192,311		190,346		183,397		156,984
Total investment securities	14,538,253		15,187,234		14,772,802		14,024,879		13,076,399
Federal funds sold	4,269		1,053		564		792		1,338
Securities purchased under agreements to resell	1,703,569		1,733,887		1,669,835		1,633,205		937,372
Interest earning deposits with banks	1,248,942		2,608,029		2,856,992		2,602,896		2,724,782
Other assets	1,238,493		1,304,400		1,288,323		1,261,277		1,258,989
Total assets	$ 34,092,368		$ 35,917,504		$ 35,530,435		$ 34,625,975		$ 33,811,970

LIABILITIES AND EQUITY:
Non-interest bearing deposits	$ 11,209,680		$ 11,544,701		$ 11,919,268		$ 11,475,113		$ 11,109,198
Savings	1,609,694		1,563,093		1,507,199		1,484,923		1,474,391
Interest checking and money market	14,847,306		14,949,727		13,873,985		13,343,180		13,283,481
Certificates of deposit of less than $100,000	411,655		429,852		441,920		464,367		491,446
Certificates of deposit of $100,000 and over	648,728		862,232		1,105,480		1,289,665		1,354,685
Total deposits	28,727,063		29,349,605		28,847,852		28,057,248		27,713,201
Borrowings:
Federal funds purchased	113,128		23,356		20,848		13,606		23,292
Securities sold under agreements to repurchase	2,258,184		2,712,468		2,620,348		2,347,270		2,142,404
Other borrowings	2,029		768		1,078		347		978
Total borrowings	2,373,341		2,736,592		2,642,274		2,361,223		2,166,674
Other liabilities	139,986		505,644		562,102		667,786		527,401
Total liabilities	31,240,390		32,591,841		32,052,228		31,086,257		30,407,276
Equity	2,851,978		3,325,663		3,478,207		3,539,718		3,404,694
Total liabilities and equity	$ 34,092,368		$ 35,917,504		$ 35,530,435		$ 34,625,975		$ 33,811,970

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE RATES

(Unaudited)	For the Three Months Ended
(Unaudited)	Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021		Jun. 30, 2021
ASSETS:
Loans:
Business⁽¹⁾	3.16	%	2.93	%	3.16	%	3.43	%	3.15	%
Real estate — construction and land	4.09		3.76		3.61		3.51		3.56
Real estate — business	3.70		3.38		3.41		3.46		3.49
Real estate — personal	3.27		3.28		3.21		3.27		3.31
Consumer	3.62		3.59		3.65		3.71		3.84
Revolving home equity	3.69		3.48		3.47		3.46		3.43
Consumer credit card	11.32		11.35		11.06		11.29		11.22
Overdrafts	—		—		—		—		—
Total loans	3.72		3.54		3.62		3.74		3.65
Loans held for sale	8.14		6.48		5.10		4.63		4.20
Investment securities:
U.S. government and federal agency obligations	4.93		3.42		3.11		5.74		5.52
Government-sponsored enterprise obligations	2.39		2.33		2.30		2.30		2.33
State and municipal obligations⁽¹⁾	2.30		2.29		2.26		2.35		2.41
Mortgage-backed securities	1.99		1.98		1.40		1.53		1.11
Asset-backed securities	1.35		1.13		1.03		1.08		1.25
Other debt securities	1.97		2.00		2.07		2.04		2.06
Total available for sale debt securities	2.08		1.91		1.59		1.80		1.64
Trading debt securities⁽¹⁾	2.46		1.84		1.54		1.01		1.19
Equity securities ⁽¹⁾	26.90		26.00		27.64		23.92		43.10
Other securities ⁽¹⁾	22.38		5.91		18.39		7.46		11.90
Total investment securities	2.36		1.97		1.82		1.89		1.78
Federal funds sold	1.79		.39		.70		.50		.60
Securities purchased under agreements to resell	1.03		1.24		1.62		2.19		4.46
Interest earning deposits with banks	.78		.18		.15		.15		.11
Total interest earning assets	2.86		2.49		2.47		2.62		2.64

LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.04		.05		.08		.08		.08
Interest checking and money market	.06		.04		.04		.05		.05
Certificates of deposit of less than $100,000	.20		.13		.14		.18		.27
Certificates of deposit of $100,000 and over	.29		.20		.14		.14		.20
Total interest bearing deposits	.07		.05		.05		.06		.07
Borrowings:
Federal funds purchased	.79		.12		.11		.10		.05
Securities sold under agreements to repurchase	.48		.10		.08		.08		.06
Other borrowings	2.37		.53		—		1.14		.82
Total borrowings	.50		.10		.08		.08		.06
Total interest bearing liabilities	.12	%	.06	%	.06	%	.06	%	.07	%

Net yield on interest earning assets	2.79	%	2.45	%	2.43	%	2.58	%	2.60	%

(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 ratios)	Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021		Jun. 30, 2021		Jun. 30, 2022		Jun. 30, 2021
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period	$134,710		$150,044		$162,775		$172,395		$200,527		$150,044		$220,834
Provision for credit losses on loans	7,287		(10,686	)	(8,474	)	(5,961	)	(27,433	)	(3,399	)	(37,788	)
Net charge-offs (recoveries):
Commercial portfolio:
Business	19		77		90		65		(4,909	)	96		(4,913	)
Real estate — construction and land	—		—		—		—		—		—		1
Real estate — business	(1	)	(7	)	6		(5	)	(85	)	(8	)	(65	)
	18		70		96		60		(4,994	)	88		(4,977	)
Personal banking portfolio:
Consumer credit card	2,937		3,372		2,964		2,908		5,155		6,309		14,136
Consumer	633		808		919		496		378		1,441		1,141
Overdraft	425		358		375		243		148		783		301
Real estate — personal	(41	)	22		(71	)	(26	)	(16	)	(19	)	(1	)
Revolving home equity	(14	)	18		(26	)	(22	)	28		4		51
	3,940		4,578		4,161		3,599		5,693		8,518		15,628
Total net loan charge-offs	3,958		4,648		4,257		3,659		699		8,606		10,651
Balance at end of period	$138,039		$134,710		$150,044		$162,775		$172,395		$138,039		$172,395
LIABILITY FOR UNFUNDED LENDING COMMITMENTS	$24,907		$25,032		$24,204		$22,784		$24,208

NET CHARGE-OFF RATIOS ⁽¹⁾
Commercial portfolio:
Business	—	%	.01	%	.01	%	—	%	(.32	%)	—	%	(.16	%)
Real estate — construction and land	—		—		—		—		—		—		—
Real estate — business	—		—		—		—		(.01	)	—		—
	—		—		—		—		(.19	)	—		(.10	)
Personal banking portfolio:
Consumer credit card	2.19		2.53		2.10		2.04		3.59		2.36		4.81
Consumer	.12		.16		.18		.10		.08		.14		.12
Overdraft	30.86		28.04		30.20		18.87		15.89		29.50		16.67
Real estate — personal	(.01	)	—		(.01	)	—		—		—		—
Revolving home equity	(.02	)	.03		(.04	)	(.03	)	.04		—		.04
	.28		.33		.29		.25		.40		.30		.55
Total	.10	%	.12	%	.11	%	.10	%	.02	%	.11	%	.13	%

CREDIT QUALITY RATIOS
Non-accrual loans to total loans	.05	%	.05	%	.06	%	.07	%	.07	%
Allowance for credit losses on loans to total loans	.88		.87		.99		1.07		1.10

NON-ACCRUAL AND PAST DUE LOANS
Non-accrual loans:
Business	$6,314		$6,756		$7,312		$8,293		$8,839
Real estate — construction and land	—		—		—		—		—
Real estate — business	167		190		214		577		655
Real estate — personal	1,436		1,389		1,631		1,551		1,672
Total	7,917		8,335		9,157		10,421		11,166
Loans past due 90 days and still accruing interest	$11,909		$10,670		$11,726		$10,496		$12,338

(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, 2022

For the quarter ended June 30, 2022, net income amounted to $115.8 million, compared to $118.2 million in the previous quarter and $162.3 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 securities gains. These decreases to net income were partly offset by higher net interest income and non-interest income. The net yield on interest earning assets grew 34 basis points to 2.79%. Average loans grew $262.4 million compared to the previous quarter, while average available for sale debt securities and average deposits declined $654.6 million and $622.5 million, respectively. For the quarter, the return on average assets was 1.36%, the return on average equity was 16.29%, and the efficiency ratio was 57.3%.

Balance Sheet Review

During the 2^nd quarter of 2022, average loans totaled $15.5 billion, an increase of $262.4 million over the prior quarter, and declined $504.9 million, or 3.2%, from the same quarter last year. Compared to the previous quarter, average balances of business loans grew $61.0 million (includes a decline of $45.1 million in Paycheck Protection Program (PPP) average loan balances). Average construction and business real estate loan balances grew $90.4 million and $68.4 million, respectively. Period end loans increased $227.6 million compared to the prior quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $36.6 million, compared to $55.6 million in the prior quarter.

Total average available for sale debt securities decreased $654.6 million compared to the previous quarter to $14.3 billion, at fair value. The decrease in investment securities was mainly the result of lower balances of mortgage-backed securities. During the current quarter, purchases of securities totaled $73.8 million with a weighted average yield of approximately 3.03%. Sales, maturities and pay downs were $715.4 million. At June 30, 2022, the duration of the investment portfolio was 3.8 years, and maturities and pay downs of approximately $2.2 billion are expected to occur during the next 12 months.

Total average deposits decreased $622.5 million this quarter compared to the previous quarter. The decrease in deposits mostly resulted from lower demand deposits and certificates of deposits of $335.0 million, and $231.7 million, respectively. Compared to the previous quarter, total average commercial and wealth deposits declined $672.4 million and $256.2 million, respectively, while total average consumer deposits increased $307.5 million. The average loans to deposits ratio was 53.9% in the current quarter and 51.9% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.4 billion in the 2^nd quarter of 2022 and $2.7 billion in the prior quarter.

Net Interest Income

Net interest income in the 2^nd quarter of 2022 amounted to $232.4 million, an increase of $23.6 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $23.6 million over the previous quarter to $235.0 million. The increase in net interest income was mainly due to higher income earned on investment securities and loans. The net yield on earning assets (tax equivalent) increased to 2.79%, compared to 2.45% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) increased $10.5 million, due to higher average rates this quarter. Interest on business, business real estate, and construction loans grew mostly due to higher average rates coupled with higher average loan balances. The average tax-equivalent yield on the loan portfolio increased 18 basis points to 3.72% this quarter.

Interest income on investment securities (tax equivalent) increased $15.6 million compared to the prior quarter, due to higher rates earned. Interest income earned on U.S. government and federal agency securities increased due to higher rates earned, which included the impact of $4.4 million in higher inflation income from Treasury inflation-protected securities. Additionally, $6.5 million of non-accrual interest was received on the sale of a private equity investment this quarter. At June 30, 2022, the Company recorded a $5.0 million adjustment to premium amortization, which increased interest income to reflect considerably slower forward prepayment speed estimates on mortgage-backed securities, but it was less than the $7.5 million adjustment recorded in the prior quarter. The yield on total investment securities was 2.36% in the current quarter, compared to 1.97% in the previous quarter.

The average rate paid on interest bearing deposits totaled .07% in the current quarter compared to .05% in the prior quarter. Interest expense on deposits increased $627 thousand this quarter compared to the previous quarter, while interest expense on securities sold under agreements to repurchase increased $2.0 million, due to a 38 basis point increase in the average rate paid. The overall rate paid on interest bearing liabilities was .12% in the current quarter compared to .06% in the prior quarter.

Non-Interest Income

In the 2^nd quarter of 2022, total non-interest income amounted to $139.4 million, an increase of $284 thousand compared to the same period last year, and increased $7.7 million compared to the prior quarter. The increase in non-interest income compared to the same period last year was mainly due to higher deposit, bank card, and sweep fees, mostly offset by lower loan fees and sales and a fair value adjustment on the Company’s deferred compensation plan assets. The increase in non-interest income compared to the prior quarter was mainly due to higher deposit account, sweep, bank card, and other fees.

Total net bank card fees in the current quarter increased $1.3 million, or 3.0%, over the same period last year, and increased $1.8 million compared to the prior quarter. Net corporate card fees increased $1.6 million, or 6.9%, 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 $28 thousand, or .3% and net merchant fees increased $39 thousand, or .8%, while net credit card fees decreased $393 thousand, or 9.6%. Total net bank card fees this quarter were comprised of fees on corporate card ($24.7 million), debit card ($10.5 million), merchant ($4.9 million) and credit card ($3.7 million) transactions.

In the current quarter, trust fees increased $535 thousand, or 1.2%, over the same period last year, resulting from higher private client fee income. Compared to the same period last year, deposit account fees increased $1.6 million, or 6.6%, mainly due to higher corporate cash management fees. Loan fees and sales, mostly mortgage banking revenue, declined $4.2 million, or 56.4%, compared to amounts recorded in the same quarter last year. Consumer brokerage fees increased $565 thousand, or 12.5%, compared to the same quarter last year.

Other non-interest income increased from the same period last year primarily due to higher sweep fees of $2.3 million and income of $2.2 million from a life insurance death benefit. These items were mostly offset by a $3.7 million decrease in fair value adjustment 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. For the 2^nd quarter of 2022, non-interest income comprised 37.5% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities gains of $1.0 million in the current quarter, compared to gains of $7.2 million in the prior quarter and gains of $16.8 million in the 2^nd quarter of 2021. Net securities gains in the current quarter primarily resulted from net fair value gains of $15.6 million in the Company’s private equity investment portfolio, mostly offset by losses of $9.6 million on sales of available for sale securities and a $4.3 million loss on the sale of an investment in the Company’s private equity portfolio. The Company received $6.5 million in nonaccrual interest, recorded in net interest income, upon the sale of the investment.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $213.5 million, compared to $198.1 million in the same period last year and $205.6 million in the prior quarter. The increase in non-interest expense compared to the same period last year was mainly due to higher salaries expense, data processing and software expense, and travel and entertainment expense. The increase in non-interest expense compared to the prior quarter was mainly due to higher salaries expense, partially offset by lower benefits expense.

Compared to the 2^nd quarter of last year, salaries and employee benefits expense increased $11.5 million, mostly due to higher full-time salaries expense, of $4.9 million and an accrual of $5.4 million for special bonuses to be paid to non-incentivized part-time and full-time employees in the 2^nd half of 2022. Full-time equivalent employees totaled 4,579 and 4,590 at June 30, 2022 and 2021, respectively.

Compared to the same period last year, data processing and software expense increased $2.7 million due to higher software amortization, bank card processing fees and increased costs for service providers this quarter. Other non-interest expense decreased $383 thousand, mainly due to a decline of $3.7 million in the deferred compensation adjustment previously mentioned, mostly offset by increases in travel and entertainment expense, loan collection fees, and legal and professional fees of $1.3 million, $430 thousand, and $339 thousand, respectively.

Income Taxes

The effective tax rate for the Company was 21.7% in the current quarter, 21.3% in the previous quarter, and 21.8% in the 2^nd quarter of 2021.

Credit Quality

Net loan charge-offs in the 2^nd quarter of 2022 amounted to $4.0 million, compared to $4.6 million in the prior quarter and $699 thousand in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .10% in the current quarter, .12% in the previous quarter, and .02% in the 2^nd quarter of last year. Net loan charge-offs on personal banking loans decreased $638 thousand to $3.9 million.

In the 2^nd quarter of 2022, annualized net loan charge-offs on average consumer credit card loans were 2.19%, compared to 2.53% in the previous quarter, and 3.59% in the same quarter last year. Consumer loan net charge-offs were .12% of average consumer loans in the current quarter, .16% in the prior quarter, and .08% in the same quarter last year.

At June 30, 2022, the allowance for credit losses on loans totaled $138.0 million, or .88% of total loans. Additionally, the liability for unfunded lending commitments at June 30, 2022 was $24.9 million, a decrease of $125 thousand compared to the liability at March 31, 2022.

At June 30, 2022, total non-accrual loans amounted to $7.9 million, a decrease of $418 thousand from the previous quarter. At June 30, 2022, the balance of non-accrual loans, which represented .05% of loans outstanding, included business loans of $6.3 million, personal real estate loans of $1.4 million, and business real estate loans of $167 thousand. Loans more than 90 days past due and still accruing interest totaled $11.9 million at June 30, 2022.

Other

During the 2^nd quarter of 2022, the Company paid a cash dividend of $.265 per common share, representing a 6.0% increase over the same period last year. The Company purchased 846,223 shares of treasury stock during the current quarter at an average price of $67.77.

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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