Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.95 per share for the three months ended March 31, 2023, compared to $.92 per share in the same quarter last year and $1.05 per share in the fourth quarter of 2022. Net income for the first quarter of 2023 amounted to $119.5 million, compared to $118.2 million in the first quarter of 2022 and $131.6 million in the prior quarter.

“Our first quarter results are the product of the consistent and conservative business model that Commerce has executed for nearly 160 years,” said John Kemper, President and Chief Executive Officer.

On deposit balances, Kemper added, “We saw normal seasonal deposit outflows in January, but experienced minimal flows throughout the remainder of the quarter, reflecting the strength and diversity of our deposit portfolio.

“Although disruption from recent bank failures may be felt across the industry for a period of time, we see this as a moment for our franchise to differentiate itself as a safe haven, and bring peace of mind to customers who put a lot of trust in Commerce and in the banking system.

“Our stakeholders can rest assured that we have ample liquidity and capital to weather any events to come, and we are well-positioned to accommodate our customers’ lending, deposit, and service needs.”

First Quarter 2023 Financial Highlights:

• Net interest income was $251.6 million, a $3.0 million decrease from the prior quarter. The net yield on interest earning assets increased 8 basis points to 3.26%.
• Non-interest income totaled $137.6 million, an increase of $5.8 million compared to the same quarter last year.
• Net securities losses of $306 thousand compared to net gains of $8.9 million in the prior quarter.
• Non-interest expense totaled $224.1 million, an increase of $18.5 million compared to the same quarter last year.
• Average loan balances totaled $16.4 billion, an increase of $518.9 million, or 3.3%, over the prior quarter.
• Total average available for sale debt securities decreased 4.8%, or $591.1 million, from the prior quarter to $11.8 billion, at fair value. During the first quarter of 2023, the unrealized loss on available for sale securities decreased $190.0 million to $1.3 billion, at period end.
• Average deposits declined $1.4 billion, or 5.1%, from the prior quarter. The average rate paid on interest bearing deposits was .71%.
• The ratio of annualized net loan charge-offs to average loans was .17% compared to .14% in the prior quarter.
• Non-accrual loans totaled $7.8 million compared to $8.3 million in the prior quarter. Non-accrual loans were .05% of total loans.
• The allowance for credit losses on loans increased $9.2 million during the first quarter to $159.3 million, and at March 31, 2023, the ratio of the allowance for credit losses on loans to total loans was .96%, compared to .92% at December 31, 2022.
• The Company purchased 547,381 shares of its common stock this quarter at an average price of $65.93.
• Total assets at March 31, 2023 were $32.0 billion, an increase of $128.9 million, or .4%, over the prior quarter.
• For the quarter, the return on average assets was 1.54%, the return on average equity was 18.75%, and the efficiency ratio was 57.5%.

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/default.aspx.

COMMERCE BANCSHARES, INC.

Management Discussion of First Quarter Results

March 31, 2023

For the quarter ended March 31, 2023, net income amounted to $119.5 million, compared to $131.6 million in the previous quarter and $118.2 million in the same quarter last year. The decrease in net income compared to the previous quarter was primarily the result of net realized investment securities losses compared to net gains recorded in the prior quarter, lower net interest income and higher non-interest expense. These decreases to income were partly offset by a decrease in the provision for credit losses. The net yield on interest earning assets grew eight basis points to 3.26%. Average loans grew $518.9 million compared to the previous quarter, while average deposits and average available for sale debt securities declined $1.4 billion and $591.1 million, respectively. For the quarter, the return on average assets was 1.54%, the return on average equity was 18.75%, and the efficiency ratio was 57.5%.

Balance Sheet Review

During the 1^st quarter of 2023, average loans totaled $16.4 billion, an increase of $518.9 million over the prior quarter, and $1.2 billion, or 7.8%, over the same quarter last year. Compared to the previous quarter, average balances of business, business real estate, and construction loans grew $177.9 million, $177.7 million, and $141.9 million, respectively. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $3.2 million, compared to $2.4 million in the prior quarter.

Total average available for sale debt securities decreased $591.1 million compared to the previous quarter to $11.8 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 1^st quarter of 2023, the unrealized loss on available for sale securities decreased $190.0 million to $1.3 billion, and sales, maturities and pay downs were $1.3 billion. At March 31, 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 $1.4 billion 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 $1.2 billion and $428.5 million, respectively, partly offset by higher certificate of deposit balances of $333.8 million. Compared to the previous quarter, total average commercial and consumer deposits declined $868.9 million and $530.1 million, respectively, while average wealth deposits increased $39.8 million. The average loans to deposits ratio was 65.0% in the current quarter and 59.7% in the prior quarter. The Company’s average borrowings, which included customer repurchase agreements of $2.4 billion, were $3.5 billion in the 1^st quarter of 2023 and $2.6 billion in the prior quarter.

Net Interest Income

Net interest income in the 1^st quarter of 2023 amounted to $251.6 million, a decrease of $3.0 million compared to the previous quarter. On a fully taxable-equivalent (FTE) basis, net interest income for the current quarter decreased $3.3 million from the previous quarter to $253.4 million. The decrease in net interest income was due to higher interest expense, partly offset by higher interest earned on loans. The net yield (FTE) on earning assets increased to 3.26%, compared to 3.18% in the prior quarter.

Compared to the previous quarter, interest income on loans (FTE) increased $23.4 million, due to higher average rates earned on all loan categories, coupled with higher average balances of construction, business, and business real estate loans. The average yield (FTE) on the loan portfolio increased 53 basis points to 5.56% this quarter.

Interest income on investment securities (FTE) decreased $1.8 million compared to the prior quarter, due to lower average balances, partly offset by higher rates earned. Interest income earned on U.S. government and federal agency securities decreased due to lower rates earned, which included the impact of $652 thousand in lower inflation income from Treasury inflation-protected securities this quarter. At March 31, 2023, the Company recorded an $802 thousand 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 2.18% in the current quarter, compared to 2.07% in the previous quarter.

The average rate paid on interest bearing deposits totaled .71% in the current quarter compared to .40% in the prior quarter. Interest expense on deposits increased $11.8 million this quarter compared to the previous quarter, while interest expense on borrowings increased $13.6 million, due to a 101 basis point increase in the average rate paid coupled with higher average borrowings of $880.3 million. The overall rate paid on interest bearing liabilities was 1.20% in the current quarter compared to .69% in the prior quarter.

Non-Interest Income

In the 1^st quarter of 2023, total non-interest income amounted to $137.6 million, an increase of $5.8 million compared to the same period last year and increased $787 thousand 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 and sweep fees. In addition, a $2.0 million increase in fair value adjustments was 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 trust fees and loan fees and sales. The increase in non-interest income compared to the prior quarter was mainly due to higher bank card fees, mostly offset by a gain on the sale of real estate recorded in the prior quarter that did not reoccur this quarter, and lower tax credit sales fee income.

Total net bank card fees in the current quarter increased $4.6 million, or 11.0%, compared to the same period last year, and increased $2.1 million compared to the prior quarter. Net corporate card fees increased $3.6 million, or 14.9%, over the same quarter of last year mainly due to higher interchange fee income. Net debit card fees increased $735 thousand, or 7.7%, and net merchant fees increased $371 thousand, or 7.4%, while net credit card fees decreased $47 thousand, or 1.3%. Total net bank card fees this quarter were comprised of fees on corporate card ($27.3 million), debit card ($10.3 million), merchant ($5.4 million) and credit card ($3.7 million) transactions.

In the current quarter, trust fees decreased $2.5 million, or 5.2%, from the same period last year, mostly resulting from lower private client and institutional trust fees. Compared to the same period last year, deposit account fees decreased $555 thousand, or 2.5%, mainly due to lower overdraft and return item fees of $2.7 million, partly offset by higher personal deposit account fees and corporate cash management fees of $1.0 million and $959 thousand, respectively. Loan fees and sales declined $1.6 million, or 38.9%, compared to amounts recorded in the same quarter last year, due to lower mortgage banking revenue.

Other non-interest income increased over the same period last year primarily due to higher sweep fees of $2.6 million, the deferred compensation adjustment previously mentioned, and a write down on a branch location of $965 thousand recorded in the 1^st quarter of 2022. For the 1^st quarter of 2023, non-interest income comprised 35.4% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities losses of $306 thousand in the current quarter, compared to gains of $8.9 million in the prior quarter and $7.2 million in the 1^st quarter of 2022. Net securities losses in the current quarter primarily resulted from losses of $3.1 million realized on sales of available for sale debt securities, mostly offset by net fair value gains of $2.3 million and a $653 thousand gain on the sale of an investment in the Company’s private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $224.1 million, compared to $205.6 million in the same period last year and $216.7 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, miscellaneous losses, 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 salaries and employee benefits expense, FDIC insurance expense, and occupancy expense, partly offset by lower travel and entertainment and legal and professional fees expense.

Compared to the 1^st quarter of last year, salaries and employee benefits expense increased $8.4 million, mostly due to higher full-time salaries expense of $7.6 million, or 8.9%, and higher employee benefits expense of $1.4 million. Full-time equivalent employees totaled 4,636 and 4,563 at March 31, 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 $9.2 million, mostly due to growth in FDIC insurance, deferred compensation, miscellaneous losses, and travel and entertainment expense of $2.3 million, $2.0 million, $1.3 million, and $1.1 million, respectively.

Income Taxes

The effective tax rate for the Company was 21.5% in the current quarter, 20.8% in the previous quarter, and 21.3% in the 1st quarter of 2022.

Credit Quality

Net loan charge-offs in the 1^st quarter of 2023 amounted to $6.8 million, compared to $5.6 million in the prior quarter and $4.6 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .17% in the current quarter, .14% in the previous quarter, and .12% in the 1^st quarter of last year. Net loan charge-offs on personal banking loans increased $1.4 million to $6.5 million, mainly due to higher overdraft and consumer credit card loan net charge-offs.

In the 1^st quarter of 2023, annualized net loan charge-offs on average consumer credit card loans were 3.15%, compared to 2.46% in the previous quarter, and 2.53% in the same quarter last year. Consumer loan net charge-offs were .25% of average consumer loans in the current quarter, .29% in the prior quarter, and .16% in the same quarter last year

At March 31, 2023, the allowance for credit losses on loans totaled $159.3 million, or .96% of total loans, and increased $9.2 million compared to the prior quarter. Additionally, the liability for unfunded lending commitments at March 31, 2023 was $28.6 million, a decrease of $4.5 million compared to the liability at December 31, 2022.

At March 31, 2023, total non-accrual loans amounted to $7.8 million, a decrease of $505 thousand compared to the previous quarter. At March 31, 2023, the balance of non-accrual loans, which represented .05% of loans outstanding, included business loans of $6.4 million, personal real estate loans of $1.3 million, and business real estate loans of $171 thousand. Loans more than 90 days past due and still accruing interest totaled $14.8 million at March 31, 2023.

Liquidity

During the 1st quarter of 2023, the Company increased its deposit balance at the Federal Reserve Bank (FRB) by $952.7 million to $1.3 billion. The change in the balance at the FRB was mostly the result of a $1.5 billion increase in Federal Home Loan Bank (FHLB) advances and $1.3 billion of sales, maturities, and paydowns in the available for sale debt securities portfolio, partly offset by a $1.5 billion decrease in total deposits.

The Company regularly pledges loans and securities to the FRB and at March 31, 2023, the Company’s pledging resulted in a total borrowing capacity of $3.8 billion, or an increase of $2.9 billion compared to December 31, 2022. The Company did not have any borrowings from the FRB’s Discount Window or its newly established Bank Term Funding Program during the current quarter. The Company also pledges loans and securities and borrows from the FHLB. As of March 31, 2023, the Company had $1.5 billion of outstanding borrowings from the FHLB and $554.3 million of remaining borrowing capacity. 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 $11.2 billion at March 31, 2023. Approximately $2.0 billion is expected to mature or pay down over the next 12 months. At March 31, 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 1^st 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 547,381 shares of treasury stock during the current quarter at an average price of $65.93.

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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