Commerce Bancshares, Inc. Reports Third Quarter Earnings Per Share Of $1.02

By: Commerce Bancshares, Inc. via Business Wire

October 18, 2022 at 06:00 AM EDT

Commerce Bancshares, Inc. announced earnings of $1.02 per share for the three months ended September 30, 2022, compared to $.99 per share in the same quarter last year and $.96 per share in the second quarter of 2022. Net income for the third quarter of 2022 amounted to $122.8 million, compared to $122.6 million in the third quarter of 2021 and $115.8 million in the prior quarter.

For the nine months ended September 30, 2022, earnings per share totaled $2.95, compared to $3.37 for the first nine months of 2021. Net income amounted to $356.8 million for the nine months ended September 30, 2022, compared to $415.9 million in the comparable period last year. For the current year to date, the return on average assets was 1.39%, and the return on average equity was 16.08%.

“Our third quarter results reflect the strengths of our balance sheet and diverse operating model,” said John Kemper. “Our variable rate earning assets and resilient core deposit base contributed to an expanding net interest margin and drove record quarterly net interest income. Additionally, our fee-based businesses contributed nearly 36% of total revenue.”

“In an increasingly uncertain economic environment, the bank remains well-positioned. Credit quality metrics and regulatory capital levels remain robust, and we are in a strong liquidity position to accommodate future loan growth.”

Third Quarter 2022 Financial Highlights:

Net interest income was $246.4 million, a $14.0 million increase over the prior quarter. The net interest margin increased 22 basis points to 3.01%.

Non-interest income totaled $138.5 million, a decrease of $913 thousand compared to the prior quarter.

Non-interest expense totaled $212.9 million, a decrease of $621 thousand compared to the prior quarter.

Average loan balances totaled $15.6 billion, an increase of $160.4 million, or 1.0%, over the prior quarter.

Total average available for sale debt securities decreased 5.8%, or $826.7 million, from the prior quarter to $13.5 billion, at fair value. Purchases of securities during the quarter totaled $53.8 million, with a weighted average yield of approximately 4.52%.

Average deposits declined $973.9 million, or 3.4% from the prior quarter. The average rate paid on interest bearing deposits was .21%.

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

Non-accrual loans totaled $7.2 million compared to $7.9 million in the prior quarter. Non-accrual loans were .05% of total loans.

The allowance for credit losses on loans increased $5.3 million during the third quarter to $143.4 million, and at September 30, 2022, the ratio of the allowance for credit losses on loans to total loans was .90% compared to .88% at June 30, 2022.

The Company purchased 710,879 shares of its common stock this quarter at an average price of $70.50.

Total assets at September 30, 2022 were $32.6 billion, a decrease of $832.8 million, or 2.5%, from the prior quarter.

For the quarter, the return on average assets was 1.48%, the return on average equity was 17.84%, and the efficiency ratio was 55.2%.

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 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 Nine Months Ended
(Unaudited) (Dollars in thousands, except per share data)	Sep. 30, 2022		Jun. 30, 2022		Sep. 30, 2021		Sep. 30, 2022		Sep. 30, 2021
FINANCIAL SUMMARY
Net interest income	$246,373		$232,385		$214,037		$687,544		$627,767
Non-interest income	138,514		139,427		137,506		409,710		412,694
Total revenue	384,887		371,812		351,543		1,097,254		1,040,461
Investment securities gains	3,410		1,029		13,108		11,602		39,765
Provision for credit losses	15,290		7,162		(7,385	)	12,594		(59,272	)
Non-interest expense	212,884		213,505		211,620		632,037		602,319
Income before taxes	160,123		152,174		160,416		464,225		537,179
Income taxes	33,936		32,021		34,662		97,859		111,947
Non-controlling interest expense	3,364		4,359		3,193		9,595		9,373
Net income attributable to Commerce Bancshares, Inc.	$122,823		$115,794		$122,561		$356,771		$415,859
Earnings per common share:
Net income — basic	$1.03		$0.96		$1.00		$2.96		$3.38
Net income — diluted	$1.02		$0.96		$0.99		$2.95		$3.37
Effective tax rate	21.65	%	21.66	%	22.05	%	21.52	%	21.21	%
Fully-taxable equivalent net interest income	$248,737		$235,010		$216,858		$695,140		$636,692
Average total interest earning assets ⁽¹⁾	$32,807,393		$33,839,655		$33,306,752		$33,853,577		$32,388,139
Diluted wtd. average shares outstanding	119,158,652		119,920,218		121,881,091		119,892,983		122,183,464

RATIOS
Average loans to deposits ⁽²⁾	56.40	%	53.93	%	54.44	%	54.05	%	57.91	%
Return on total average assets	1.48		1.36		1.40		1.39		1.65
Return on average equity ⁽³⁾	17.84		16.29		13.74		16.08		16.14
Non-interest income to total revenue	35.99		37.50		39.11		37.34		39.66
Efficiency ratio ⁽⁴⁾	55.19		57.29		59.95		57.48		57.76
Net yield on interest earning assets	3.01		2.79		2.58		2.75		2.63

EQUITY SUMMARY
Cash dividends per share	$.265		$.265		$.250		$.795		$.750
Cash dividends on common stock	$31,740		$31,935		$30,645		$95,818		$92,204
Book value per share ⁽⁵⁾	$19.86		$22.29		$28.58
Market value per share ⁽⁵⁾	$66.16		$65.65		$66.36
High market value per share	$73.97		$74.32		$72.08
Low market value per share	$64.20		$62.80		$61.81
Common shares outstanding ⁽⁵⁾	119,361,141		120,032,698		122,148,786
Tangible common equity to tangible assets ⁽⁶⁾	6.80	%	7.56	%	9.71	%
Tier I leverage ratio	9.87	%	9.45	%	9.31	%

OTHER QTD INFORMATION
Number of bank/ATM locations	277		279		292
Full-time equivalent employees	4,595		4,579		4,582

(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 Nine Months Ended
(Unaudited) (In thousands, except per share data)	Sep. 30, 2022		Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021		Sep. 30, 2022		Sep. 30, 2021
Interest income	$262,666		$238,154		$211,782		$210,479		$216,981		$712,602		$637,811
Interest expense	16,293		5,769		2,996		2,822		2,944		25,058		10,044
Net interest income	246,373		232,385		208,786		207,657		214,037		687,544		627,767
Provision for credit losses	15,290		7,162		(9,858	)	(7,054	)	(7,385	)	12,594		(59,272	)
Net interest income after credit losses	231,083		225,223		218,644		214,711		221,422		674,950		687,039
NON-INTEREST INCOME
Trust fees	45,406		46,792		47,811		48,893		48,950		140,009		139,334
Bank card transaction fees	45,638		43,873		42,045		44,773		42,815		131,556		123,118
Deposit account charges and other fees	24,521		25,564		22,307		25,493		25,161		72,392		71,724
Consumer brokerage services	5,085		5,068		4,446		4,878		4,900		14,599		13,484
Capital market fees	3,393		3,327		4,125		3,841		3,794		10,845		12,102
Loan fees and sales	3,094		3,246		4,235		5,248		6,842		10,575		24,472
Other	11,377		11,557		6,800		14,573		5,044		29,734		28,460
Total non-interest income	138,514		139,427		131,769		147,699		137,506		409,710		412,694
INVESTMENT SECURITIES GAINS (LOSSES), NET	3,410		1,029		7,163		(9,706	)	13,108		11,602		39,765
NON-INTEREST EXPENSE
Salaries and employee benefits	137,393		142,243		135,953		132,640		132,824		415,589		392,608
Data processing and software	28,050		27,635		27,016		25,777		25,598		82,701		76,015
Net occupancy	12,544		12,503		12,296		12,308		12,329		37,343		35,877
Equipment	5,036		4,734		4,568		4,691		4,440		14,338		13,398
Supplies and communication	4,581		4,361		4,713		4,430		4,530		13,655		12,688
Marketing	6,228		5,836		6,344		5,395		5,623		18,408		16,461
Other	19,052		16,193		14,758		18,341		26,276		50,003		55,272
Total non-interest expense	212,884		213,505		205,648		203,582		211,620		632,037		602,319
Income before income taxes	160,123		152,174		151,928		149,122		160,416		464,225		537,179
Less income taxes	33,936		32,021		31,902		33,764		34,662		97,859		111,947
Net income	126,187		120,153		120,026		115,358		125,754		366,366		425,232
Less non-controlling interest expense	3,364		4,359		1,872		452		3,193		9,595		9,373
Net income attributable to Commerce Bancshares, Inc.	$122,823		$115,794		$118,154		$114,906		$122,561		$356,771		$415,859
Net income per common share — basic	$1.03		$0.96		$0.97		$0.94		$1.00		$2.96		$3.38
Net income per common share — diluted	$1.02		$0.96		$0.97		$0.94		$0.99		$2.95		$3.37

OTHER INFORMATION
Return on total average assets	1.48	%	1.36	%	1.33	%	1.28	%	1.40	%	1.39	%	1.65	%
Return on average equity ⁽¹⁾	17.84		16.29		14.41		13.11		13.74		16.08		16.14
Efficiency ratio ⁽²⁾	55.19		57.29		60.29		57.29		59.95		57.48		57.76
Effective tax rate	21.65		21.66		21.26		22.71		22.05		21.52		21.21
Net yield on interest earning assets	3.01		2.79		2.45		2.43		2.58		2.75		2.63
Fully-taxable equivalent net interest income	$248,737		$235,010		$211,393		$210,424		$216,858		$695,140		$636,692

(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)	Sep. 30, 2022			Jun. 30, 2022			Sep. 30, 2021
ASSETS
Loans
Business	$	5,528,895		$	5,441,592		$	5,277,850
Real estate — construction and land		1,206,955			1,266,260			1,257,836
Real estate — business		3,331,627			3,215,578			2,937,852
Real estate — personal		2,862,519			2,836,835			2,769,292
Consumer		2,116,371			2,089,592			2,049,559
Revolving home equity		286,026			271,854			281,442
Consumer credit card		563,349			558,102			569,976
Overdrafts		3,216			6,814			4,583
Total loans		15,898,958			15,686,627			15,148,390
Allowance for credit losses on loans		(143,377	)		(138,039	)		(162,775	)
Net loans		15,755,581			15,548,588			14,985,615
Loans held for sale		8,062			6,467			16,043
Investment securities:
Available for sale debt securities		12,632,510			13,700,308			14,165,656
Trading debt securities		39,222			34,195			40,114
Equity securities		8,954			8,546			9,174
Other securities		222,742			207,989			184,450
Total investment securities		12,903,428			13,951,038			14,399,394
Federal funds sold		14,020			26,000			—
Securities purchased under agreements to resell		1,275,000			1,450,000			1,750,000
Interest earning deposits with banks		642,943			684,994			1,888,545
Cash and due from banks		344,178			355,524			344,460
Premises and equipment — net		407,833			397,877			377,476
Goodwill		138,921			138,921			138,921
Other intangible assets — net		15,599			15,853			14,458
Other assets		1,097,031			860,108			582,631
Total assets	$	32,602,596		$	33,435,370		$	34,497,543
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	10,468,591		$	11,102,585		$	11,622,855
Savings, interest checking and money market		16,014,487			16,063,064			14,907,654
Certificates of deposit of less than $100,000		391,145			404,096			452,432
Certificates of deposit of $100,000 and over		597,093			601,488			1,163,343
Total deposits		27,471,316			28,171,233			28,146,284
Federal funds purchased and securities sold under agreements to repurchase		2,314,590			2,234,296			2,253,753
Other borrowings		1,831			6,025			4,006
Other liabilities		443,752			348,503			602,279
Total liabilities		30,231,489			30,760,057			31,006,322
Stockholders’ equity:
Common stock		610,804			610,804			589,352
Capital surplus		2,683,631			2,682,161			2,427,544
Retained earnings		353,446			262,363			396,655
Treasury stock		(176,943	)		(129,588	)		(92,047	)
Accumulated other comprehensive income		(1,119,344	)		(766,894	)		159,166
Total stockholders’ equity		2,351,594			2,658,846			3,480,670
Non-controlling interest		19,513			16,467			10,551
Total equity		2,371,107			2,675,313			3,491,221
Total liabilities and equity	$	32,602,596		$	33,435,370		$	34,497,543

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE BALANCE SHEETS

(Unaudited) (In thousands)	For the Three Months Ended
(Unaudited) (In thousands)	Sep. 30, 2022			Jun. 30, 2022			Mar. 31, 2022			Dec. 31, 2021			Sep. 30, 2021
ASSETS:
Loans:
Business	$	5,317,696		$	5,385,181		$	5,324,172		$	5,191,844		$	5,437,498
Real estate — construction and land		1,288,721			1,225,267			1,134,902			1,228,237			1,168,566
Real estate — business		3,258,128			3,163,508			3,095,068			3,003,459			2,982,847
Real estate — personal		2,844,376			2,825,578			2,808,980			2,785,095			2,775,638
Consumer		2,101,622			2,070,560			2,040,200			2,043,690			2,041,263
Revolving home equity		280,923			272,280			273,859			276,464			281,689
Consumer credit card		550,058			537,681			540,844			559,429			566,406
Overdrafts		4,438			5,524			5,178			4,926			5,110
Total loans		15,645,962			15,485,579			15,223,203			15,093,144			15,259,017
Allowance for credit losses on loans		(137,833	)		(134,670	)		(149,685	)		(162,428	)		(172,112	)
Net loans		15,508,129			15,350,909			15,073,518			14,930,716			15,086,905
Loans held for sale		7,170			7,933			9,383			11,203			16,021
Investment securities:
U.S. government and federal agency obligations		1,113,442			1,119,305			1,103,749			1,009,025			727,566
Government-sponsored enterprise obligations		55,753			55,762			51,770			50,777			50,785
State and municipal obligations		2,052,908			2,126,380			2,077,600			2,095,517			2,039,942
Mortgage-backed securities		6,847,912			7,158,252			7,316,609			7,141,249			7,115,419
Asset-backed securities		3,870,953			4,038,113			3,933,061			3,514,541			3,028,076
Other debt securities		587,026			643,463			636,247			629,643			608,642
Unrealized gain (loss) on debt securities		(1,064,534	)		(851,110	)		(174,297	)		86,020			230,058
Total available for sale debt securities		13,463,460			14,290,165			14,944,739			14,526,772			13,800,488
Trading debt securities		35,621			43,904			40,686			46,513			32,238
Equity securities		8,838			9,094			9,498			9,171			8,756
Other securities		208,708			195,090			192,311			190,346			183,397
Total investment securities		13,716,627			14,538,253			15,187,234			14,772,802			14,024,879
Federal funds sold		13,486			4,269			1,053			564			792
Securities purchased under agreements to resell		1,379,341			1,703,569			1,733,887			1,669,835			1,633,205
Interest earning deposits with banks		980,273			1,248,942			2,608,029			2,856,992			2,602,896
Other assets		1,256,498			1,238,493			1,304,400			1,288,323			1,261,277
Total assets	$	32,861,524		$	34,092,368		$	35,917,504		$	35,530,435		$	34,625,975

LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	10,758,353		$	11,209,680		$	11,544,701		$	11,919,268		$	11,475,113
Savings		1,595,857			1,609,694			1,563,093			1,507,199			1,484,923
Interest checking and money market		14,423,713			14,847,306			14,949,727			13,873,985			13,343,180
Certificates of deposit of less than $100,000		397,071			411,655			429,852			441,920			464,367
Certificates of deposit of $100,000 and over		578,158			648,728			862,232			1,105,480			1,289,665
Total deposits		27,753,152			28,727,063			29,349,605			28,847,852			28,057,248
Borrowings:
Federal funds purchased		51,929			113,128			23,356			20,848			13,606
Securities sold under agreements to repurchase		2,199,866			2,258,184			2,712,468			2,620,348			2,347,270
Other borrowings		2,010			2,029			768			1,078			347
Total borrowings		2,253,805			2,373,341			2,736,592			2,642,274			2,361,223
Other liabilities		123,691			139,986			505,644			562,102			667,786
Total liabilities		30,130,648			31,240,390			32,591,841			32,052,228			31,086,257
Equity		2,730,876			2,851,978			3,325,663			3,478,207			3,539,718
Total liabilities and equity	$	32,861,524		$	34,092,368		$	35,917,504		$	35,530,435		$	34,625,975

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE RATES

(Unaudited)	For the Three Months Ended
(Unaudited)	Sep. 30, 2022		Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021
ASSETS:
Loans:
Business⁽¹⁾	3.94	%	3.16	%	2.93	%	3.16	%	3.43	%
Real estate — construction and land	5.27		4.09		3.76		3.61		3.51
Real estate — business	4.40		3.70		3.38		3.41		3.46
Real estate — personal	3.36		3.27		3.28		3.21		3.27
Consumer	4.17		3.62		3.59		3.65		3.71
Revolving home equity	4.82		3.69		3.48		3.47		3.46
Consumer credit card	12.05		11.32		11.35		11.06		11.29
Overdrafts	—		—		—		—		—
Total loans	4.37		3.72		3.54		3.62		3.74
Loans held for sale	8.80		8.14		6.48		5.10		4.63
Investment securities:
U.S. government and federal agency obligations	4.51		4.93		3.42		3.11		5.74
Government-sponsored enterprise obligations	2.36		2.39		2.33		2.30		2.30
State and municipal obligations⁽¹⁾	2.27		2.30		2.29		2.26		2.35
Mortgage-backed securities	1.93		1.99		1.98		1.40		1.53
Asset-backed securities	1.62		1.35		1.13		1.03		1.08
Other debt securities	1.93		1.97		2.00		2.07		2.04
Total available for sale debt securities	2.09		2.08		1.91		1.59		1.80
Trading debt securities⁽¹⁾	2.74		2.46		1.84		1.54		1.01
Equity securities ⁽¹⁾	27.11		26.90		26.00		27.64		23.92
Other securities ⁽¹⁾	7.09		22.38		5.91		18.39		7.46
Total investment securities	2.18		2.36		1.97		1.82		1.89
Federal funds sold	2.77		1.79		.39		.70		.50
Securities purchased under agreements to resell	1.72		1.03		1.24		1.62		2.19
Interest earning deposits with banks	2.25		.78		.18		.15		.15
Total interest earning assets	3.21		2.86		2.49		2.47		2.62

LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.04		.04		.05		.08		.08
Interest checking and money market	.20		.06		.04		.04		.05
Certificates of deposit of less than $100,000	.41		.20		.13		.14		.18
Certificates of deposit of $100,000 and over	.60		.29		.20		.14		.14
Total interest bearing deposits	.21		.07		.05		.05		.06
Borrowings:
Federal funds purchased	2.41		.79		.12		.11		.10
Securities sold under agreements to repurchase	1.37		.48		.10		.08		.08
Other borrowings	1.78		2.37		.53		—		1.14
Total borrowings	1.39		.50		.10		.08		.08
Total interest bearing liabilities	.34	%	.12	%	.06	%	.06	%	.06	%

Net yield on interest earning assets	3.01	%	2.79	%	2.45	%	2.43	%	2.58	%

(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 Nine Months Ended
(Unaudited) (In thousands, except ratios)	Sep. 30, 2022		Jun. 30, 2022		Mar. 31, 2022		Dec. 31, 2021		Sep. 30, 2021		Sep. 30, 2022		Sep. 30, 2021
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period	$138,039		$134,710		$150,044		$162,775		$172,395		$150,044		$220,834
Provision for credit losses on loans	10,150		7,287		(10,686	)	(8,474	)	(5,961	)	6,751		(43,749	)
Net charge-offs (recoveries):
Commercial portfolio:
Business	461		19		77		90		65		557		(4,848	)
Real estate — construction and land	—		—		—		—		—		—		1
Real estate — business	(8	)	(1	)	(7	)	6		(5	)	(16	)	(70	)
	453		18		70		96		60		541		(4,917	)
Personal banking portfolio:
Consumer credit card	2,882		2,937		3,372		2,964		2,908		9,191		17,044
Consumer	827		633		808		919		496		2,268		1,637
Overdraft	703		425		358		375		243		1,486		544
Real estate — personal	(15	)	(41	)	22		(71	)	(26	)	(34	)	(27	)
Revolving home equity	(38	)	(14	)	18		(26	)	(22	)	(34	)	29
	4,359		3,940		4,578		4,161		3,599		12,877		19,227
Total net loan charge-offs	4,812		3,958		4,648		4,257		3,659		13,418		14,310
Balance at end of period	$143,377		$138,039		$134,710		$150,044		$162,775		$143,377		$162,775
LIABILITY FOR UNFUNDED LENDING COMMITMENTS	$30,047		$24,907		$25,032		$24,204		$22,784

NET CHARGE-OFF RATIOS ⁽¹⁾
Commercial portfolio:
Business	.03	%	—	%	.01	%	.01	%	—	%	.01	%	(.11	%)
Real estate — construction and land	—		—		—		—		—		—		—
Real estate — business	—		—		—		—		—		—		—
	.02		—		—		—		—		.01		(.06	)
Personal banking portfolio:
Consumer credit card	2.08		2.19		2.53		2.10		2.04		2.26		3.91
Consumer	.16		.12		.16		.18		.10		.15		.11
Overdraft	62.85		30.86		28.04		30.20		18.87		39.39		17.59
Real estate — personal	—		(.01	)	—		(.01	)	—		—		—
Revolving home equity	(.05	)	(.02	)	.03		(.04	)	(.03	)	(.02	)	.01
	.30		.28		.33		.29		.25		.30		.45
Total	.12	%	.10	%	.12	%	.11	%	.10	%	.12	%	.12	%

CREDIT QUALITY RATIOS
Non-accrual loans to total loans	.05	%	.05	%	.05	%	.06	%	.07	%
Allowance for credit losses on loans to total loans	.90		.88		.87		.99		1.07

NON-ACCRUAL AND PAST DUE LOANS
Non-accrual loans:
Business	$5,645		$6,314		$6,756		$7,312		$8,293
Real estate — construction and land	—		—		—		—		—
Real estate — business	149		167		190		214		577
Real estate — personal	1,390		1,436		1,389		1,631		1,551
Total	7,184		7,917		8,335		9,157		10,421
Loans past due 90 days and still accruing interest	$12,538		$11,909		$10,670		$11,726		$10,496

(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 Third Quarter Results

September 30, 2022

For the quarter ended September 30, 2022, net income amounted to $122.8 million, compared to $115.8 million in the previous quarter and $122.6 million in the same quarter last year. The increase in net income compared to the previous quarter was primarily the result of an increase in net interest income, partly offset by an increase in the provision for credit losses. The net yield on interest earning assets grew 22 basis points to 3.01%. Average loans grew $160.4 million compared to the previous quarter, while average available for sale debt securities and average deposits declined $826.7 million and $973.9 million, respectively. For the quarter, the return on average assets was 1.48%, the return on average equity was 17.84%, and the efficiency ratio was 55.2%.

Balance Sheet Review

During the 3rd quarter of 2022, average loans totaled $15.6 billion, an increase of $160.4 million over the prior quarter, and $386.9 million, or 2.5%, over the same quarter last year. Compared to the previous quarter, average balances of business real estate, construction, and consumer loans grew $94.6 million, $63.5 million, and $31.1 million, respectively, while business loans declined $67.5 million. Period end loans increased $212.3 million compared to the prior quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $16.7 million, compared to $36.6 million in the prior quarter.

Total average available for sale debt securities decreased $826.7 million compared to the previous quarter to $13.5 billion, at fair value. The decrease in investment securities was mainly the result of lower balances of mortgage-backed and other asset-backed securities. During the current quarter, purchases of securities totaled $53.8 million with a weighted average yield of approximately 4.52%. Sales, maturities and pay downs were $658.2 million. At September 30, 2022, the duration of the investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.4 billion are expected to occur during the next 12 months.

Total average deposits decreased $973.9 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 $451.3 million and $423.6 million, respectively. Compared to the previous quarter, total average commercial, wealth, and consumer deposits declined $353.4 million, $327.3 million, and $291.1 million, respectively. The average loans to deposits ratio was 56.4% in the current quarter and 53.9% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.3 billion in the 3rd quarter of 2022 and $2.4 billion in the prior quarter.

Net Interest Income

Net interest income in the 3rd quarter of 2022 amounted to $246.4 million, an increase of $14.0 million compared to the previous quarter. On a fully taxable-equivalent (FTE) basis, net interest income for the current quarter increased $13.7 million over the previous quarter to $248.7 million. The increase in net interest income was due to higher interest earned on loans, partly offset by lower interest earned on investment securities and higher interest expense. The net yield (FTE) on earning assets increased to 3.01%, compared to 2.79% in the prior quarter.

Compared to the previous quarter, interest income on loans (FTE) increased $28.9 million, mostly due to higher average rates on business, business real estate, construction, and consumer loans. The average yield (FTE) on the loan portfolio increased 65 basis points to 4.37% this quarter.

Interest income on investment securities (FTE) decreased $9.1 million compared to the prior quarter, due to lower rates earned, coupled with lower average balances. Interest income earned on U.S. government and federal agency securities decreased due to lower rates earned, which included the impact of $1.0 million in lower inflation income from Treasury inflation-protected securities this quarter. Additionally, $6.5 million of non-accrual interest was received on the sale of a private equity investment last quarter. At September 30, 2022, the Company recorded a $1.5 million adjustment to premium amortization, which increased interest income to reflect slower forward prepayment speed estimates on mortgage-backed securities, but it was less than the $5.0 million adjustment recorded in the prior quarter. The average yield (FTE) on total investment securities was 2.18% in the current quarter, compared to 2.36% in the previous quarter.

The average rate paid on interest bearing deposits totaled .21% in the current quarter compared to .07% in the prior quarter. Interest expense on deposits increased $5.9 million this quarter compared to the previous quarter, while interest expense on securities sold under agreements to repurchase increased $4.9 million, due to an 89 basis point increase in the average rate paid. The overall rate paid on interest bearing liabilities was .34% in the current quarter compared to .12% in the prior quarter.

Non-Interest Income

In the 3rd quarter of 2022, total non-interest income amounted to $138.5 million, an increase of $1.0 million compared to the same period last year and decreased $913 thousand compared to the prior quarter. The increase in non-interest income compared to the same period last year was mainly due to sweep and bank card fees, mostly offset by lower loan fees and sales and trust fees. The decrease in non-interest income compared to the prior quarter was mainly due to lower trust and deposit account fees, and income of $2.2 million recorded last quarter from a life insurance death benefit. These decreases were mostly offset by higher bank card and sweep fees.

Total net bank card fees in the current quarter increased $2.8 million, or 6.6%, over the same period last year, and increased $1.8 million compared to the prior quarter. Net corporate card fees increased $3.0 million, or 12.6%, 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 $106 thousand, or 1.0%, and net merchant fees increased $30 thousand, or .6%, while net credit card fees decreased $266 thousand, or 6.9%. Total net bank card fees this quarter were comprised of fees on corporate card ($26.3 million), debit card ($10.5 million), merchant ($5.2 million) and credit card ($3.6 million) transactions.

In the current quarter, trust fees decreased $3.5 million, or 7.2%, from the same period last year, resulting from lower private client fee income. Compared to the same period last year, deposit account fees decreased $640 thousand, or 2.5%, mainly due to lower overdraft and return item fees. Loan fees and sales, mostly mortgage banking revenue, declined $3.7 million, or 54.8%, compared to amounts recorded in the same quarter last year.

Other non-interest income increased over the same period last year primarily due to higher sweep fees of $3.4 million and a $2.0 million loss on an equity method investment recorded in the 3rd quarter of 2021. For the 3rd quarter of 2022, non-interest income comprised 36.0% 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 gains of $1.0 million in the prior quarter and gains of $13.1 million in the 3rd quarter of 2021. Net securities gains in the current quarter primarily resulted from net fair value gains of $14.1 million in the Company’s private equity investment portfolio, mostly offset by a loss of $10.7 million on the sale of an available for sale security.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $212.9 million, compared to $211.6 million in the same period last year and $213.5 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, mostly offset by $8.2 million in litigation settlement costs recorded last year. The decrease in non-interest expense compared to the prior quarter was mainly due to lower salaries expense driven by an accrual of $5.4 million for special bonuses recorded last quarter, and higher other non-interest expense.

Compared to the 3rd quarter of last year, salaries and employee benefits expense increased $4.6 million, due to higher full-time salaries expense of $5.6 million, or 6.4%, partly offset by lower incentive compensation expense of $2.5 million. Full-time equivalent employees totaled 4,595 and 4,582 at September 30, 2022 and 2021, respectively.

Compared to the same period last year, data processing and software expense increased $2.5 million due to higher software amortization, bank card processing fees and increased costs for service providers this quarter. Marketing expense increased $605 thousand, while other non-interest expense decreased $7.2 million. This decrease was mainly due to $8.2 million in litigation settlement costs recorded last year, lower legal and professional fees of $1.1 million and higher deferred loan origination costs of $755 thousand. These decreases to expense were partly offset by increases in travel and entertainment expense and insurance expense of $1.5 million and $619 thousand, respectively.

Income Taxes

The effective tax rate for the Company was 21.6% in the current quarter, 21.7% in the previous quarter, and 22.0% in the 3rd quarter of 2021.

Credit Quality

Net loan charge-offs in the 3rd quarter of 2022 amounted to $4.8 million, compared to $4.0 million in the prior quarter and $3.7 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .12% in the current quarter, .10% in the previous quarter, and .10% in the 3rd quarter of last year. Net loan charge-offs on personal banking loans increased $419 thousand to $4.4 million.

In the 3rd quarter of 2022, annualized net loan charge-offs on average consumer credit card loans were 2.08%, compared to 2.19% in the previous quarter, and 2.04% in the same quarter last year. Consumer loan net charge-offs were .16% of average consumer loans in the current quarter, .12% in the prior quarter, and .10% in the same quarter last year.

At September 30, 2022, the allowance for credit losses on loans totaled $143.4 million, or .90% of total loans, and increased $5.3 million compared to the prior quarter. Additionally, the liability for unfunded lending commitments at September 30, 2022 was $30.0 million, an increase of $5.1 million compared to the liability at June 30, 2022.

At September 30, 2022, total non-accrual loans amounted to $7.2 million, a decrease of $733 thousand from the previous quarter. At September 30, 2022, the balance of non-accrual loans, which represented .05% of loans outstanding, included business loans of $5.6 million, personal real estate loans of $1.4 million, and business real estate loans of $149 thousand. Loans more than 90 days past due and still accruing interest totaled $12.5 million at September 30, 2022.

Other

During the 3rd 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 710,879 shares of treasury stock during the current quarter at an average price of $70.50.

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.