Commerce Bancshares, Inc. announced earnings of $1.04 per share for the three months ended December 31, 2022, compared to $.90 per share in the same quarter last year and $.97 per share in the third quarter of 2022. Net income for the fourth quarter of 2022 amounted to $131.6 million, compared to $114.9 million in the fourth quarter of 2021 and $122.8 million in the prior quarter.

“The company delivered strong results in the fourth quarter,” said John Kemper, President and Chief Executive Officer. “Loan growth, margin expansion, and resilient fee-based income all contributed to record quarterly revenue. Taking stock of where we are and looking ahead into 2023, the strength of our deposit franchise and our long-term, conservative and disciplined approach to credit and capital management position us well in an uncertain environment.

“Our results would not be possible without our talented team members and their unwavering commitment to our purpose and culture. Our results are a reflection of the way our team works collaboratively, communicates, and strives toward the shared goal of helping our customers focus on what matters most.”

Fourth Quarter 2022 Financial Highlights:

• Net interest income was $254.6 million, an $8.3 million increase over the prior quarter. The net yield on interest earning assets increased 17 basis points to 3.18%.

• Non-interest income totaled $136.8 million, a decrease of $1.7 million compared to the prior quarter.

• Non-interest expense totaled $216.7 million, an increase of $3.9 million compared to the prior quarter.

• Average loan balances totaled $15.9 billion, an increase of $239.0 million, or 1.5%, over the prior quarter.

• Total average available for sale debt securities decreased 7.9%, or $1.1 billion, from the prior quarter to $12.4 billion, at fair value. Purchases of securities during the quarter totaled $145.3 million, with a weighted average yield of approximately 5.05%.

• Average deposits declined $1.1 billion, or 4.1%, from the prior quarter. The average rate paid on interest bearing deposits was .40%.

• The ratio of annualized net loan charge-offs to average loans was .14% compared to .12% in the prior quarter.

• Non-accrual loans totaled $8.3 million compared to $7.2 million in the prior quarter. Non-accrual loans were .05% of total loans.

• The allowance for credit losses on loans increased $6.8 million during the fourth quarter to $150.1 million, and at December 31, 2022, the ratio of the allowance for credit losses on loans to total loans was .92%, compared to .90% at September 30, 2022.

• The Company purchased 332,178 shares of its common stock this quarter at an average price of $70.15.

• Total assets at December 31, 2022 were $31.9 billion, a decrease of $726.7 million, or 2.2%, from the prior quarter.

• For the quarter, the return on average assets was 1.65%, the return on average equity was 21.88%, and the efficiency ratio was 55.3%.

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 almost 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 Fourth Quarter Results

December 31, 2022

For the quarter ended December 31, 2022, net income amounted to $131.6 million, compared to $122.8 million in the previous quarter and $114.9 million in the same quarter last year. The increase in net income compared to the previous quarter was primarily the result of increases in net interest income and investment securities gains, partly offset by lower non-interest income and higher non-interest expense. The net yield on interest earning assets grew 17 basis points to 3.18%. Average loans grew $239.0 million compared to the previous quarter, while average available for sale debt securities and average deposits each declined $1.1 billion. For the quarter, the return on average assets was 1.65%, the return on average equity was 21.88%, and the efficiency ratio was 55.3%.

Balance Sheet Review

During the 4th quarter of 2022, average loans totaled $15.9 billion, an increase of $239.0 million over the prior quarter, and $791.9 million, or 5.3%, over the same quarter last year. Compared to the previous quarter, average balances of business, business real estate, and personal real estate loans grew $160.5 million, $42.6 million, and $42.3 million, respectively. Period end loans increased $404.2 million compared to the prior quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $2.4 million, compared to $16.7 million in the prior quarter.

Total average available for sale debt securities decreased $1.1 billion compared to the previous quarter to $12.4 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 $145.3 million with a weighted average yield of approximately 5.05%. Maturities and pay downs were $573.2 million. At December 31, 2022, the duration of the investment portfolio was 3.7 years, and maturities and pay downs of approximately $2.4 billion are expected to occur during the next 12 months.

Total average deposits decreased $1.1 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 $397.5 million and $729.7 million, respectively. Compared to the previous quarter, total average commercial, consumer, and wealth deposits declined $554.3 million, $426.7 million, and $162.0 million, respectively. The average loans to deposits ratio was 59.7% in the current quarter and 56.4% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.6 billion in the 4th quarter of 2022 and $2.3 billion in the prior quarter.

Net Interest Income

Net interest income in the 4th quarter of 2022 amounted to $254.6 million, an increase of $8.3 million compared to the previous quarter. On a fully taxable-equivalent (FTE) basis, net interest income for the current quarter increased $7.9 million over the previous quarter to $256.7 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 3.18%, compared to 3.01% in the prior quarter.

Compared to the previous quarter, interest income on loans (FTE) increased $29.2 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 66 basis points to 5.03% this quarter.

Interest income on investment securities (FTE) decreased $7.0 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 $6.9 million in lower inflation income from Treasury inflation-protected securities this quarter. At December 31, 2022, the Company recorded a $1.1 million adjustment to premium amortization, which decreased interest income to reflect faster forward prepayment speed estimates on mortgage-backed securities. The average yield (FTE) on total investment securities was 2.07% in the current quarter, compared to 2.18% in the previous quarter.

The average rate paid on interest bearing deposits totaled .40% in the current quarter compared to .21% in the prior quarter. Interest expense on deposits increased $7.5 million this quarter compared to the previous quarter, while interest expense on securities sold under agreements to repurchase increased $5.5 million, due to a 92 basis point increase in the average rate paid. The overall rate paid on interest bearing liabilities was .69% in the current quarter compared to .34% in the prior quarter.

Non-Interest Income

In the 4th quarter of 2022, total non-interest income amounted to $136.8 million, a decrease of $10.9 million compared to the same period last year and decreased $1.7 million compared to the prior quarter. The decrease in non-interest income compared to the same period last year was mainly due to lower trust fees, deposit account fees, and loan fees and sales, partly offset by higher sweep fees. The decrease in non-interest income compared to the prior quarter was mainly due to lower deposit account fees and bank card fees. These decreases were partly offset by a $2.5 million increase in fair value adjustments 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.

Total net bank card fees in the current quarter decreased $185 thousand, or .4%, compared to the same period last year, and decreased $1.1 million compared to the prior quarter. Net corporate card fees increased $269 thousand, or 1.1%, over the same quarter of last year mainly due to higher interchange fee income, partly offset by higher rewards expense. Net debit card fees decreased $361 thousand, or 3.4%, and net credit card fees decreased $226 thousand, or 6.0%, while net merchant fees increased $133 thousand, or 2.5%. Total net bank card fees this quarter were comprised of fees on corporate card ($25.2 million), debit card ($10.4 million), merchant ($5.5 million) and credit card ($3.5 million) transactions.

In the current quarter, trust fees decreased $4.2 million, or 8.6%, from the same period last year, resulting from lower private client and institutional trust fees. Compared to the same period last year, deposit account fees decreased $3.5 million, or 13.7%, mainly due to lower overdraft and return item fees of $4.1 million. In September 2022, enhancements were made to consumer checking accounts that eliminated return item fees and lowered overdraft fees. Loan fees and sales declined $2.7 million, or 51.1%, compared to amounts recorded in the same quarter last year, mostly due to lower mortgage banking revenue.

Other non-interest income increased over the same period last year primarily due to higher sweep fees of $3.0 million, partly offset by lower gains on asset sales of $2.3 million. A $1.0 million gain on the sale of real estate was recorded this quarter, but it was lower than the $3.7 million gain on the sale of real estate recorded in the 4th quarter of 2021. For the 4th quarter of 2022, non-interest income comprised 35.0% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities gains of $8.9 million in the current quarter, compared to gains of $3.4 million in the prior quarter and losses of $9.7 million in the 4th quarter of 2021. In the current quarter, the Company's private equity investment portfolio had net fair value gains and a gain on the sale of an investment of $6.7 million and $1.6 million, respectively.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $216.7 million, compared to $203.6 million in the same period last year and $212.9 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, data processing and software expense, miscellaneous losses, and travel and entertainment expense. The increase in non-interest expense compared to the prior quarter was mainly due to higher salaries and employee benefits expense, legal and professional fees expense, and the deferred compensation adjustment mentioned above, partly offset by lower marketing and occupancy expense.

Compared to the 4th quarter of last year, salaries and employee benefits expense increased $5.8 million, mostly due to higher full-time salaries expense, of $4.1 million, or 4.7%, and higher employee benefits expense of $1.3 million. Full-time equivalent employees totaled 4,594 and 4,567 at December 31, 2022 and 2021, respectively.

Compared to the same period last year, data processing and software expense increased $2.2 million due to higher software expense, bank card processing fees and increased costs for service providers. Other non-interest expense increased $5.3 million, mostly due to increases in miscellaneous losses, travel and entertainment, insurance, and professional fees expense of $1.6 million, $1.2 million, $742 thousand, and $507 thousand, respectively.

Income Taxes

The effective tax rate for the Company was 20.8% in the current quarter, 21.6% in the previous quarter, and 22.7% in the 4th quarter of 2021.

Credit Quality

Net loan charge-offs in the 4th quarter of 2022 amounted to $5.6 million, compared to $4.8 million in the prior quarter and $4.3 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .14% in the current quarter, .12% in the previous quarter, and .11% in the 4th quarter of last year. Net loan charge-offs on personal banking loans increased $794 thousand to $5.2 million, mainly due to higher consumer and consumer credit card loan net charge-offs.

In the 4th quarter of 2022, annualized net loan charge-offs on average consumer credit card loans were 2.46%, compared to 2.08% in the previous quarter, and 2.10% in the same quarter last year. Consumer loan net charge-offs were .29% of average consumer loans in the current quarter, .16% in the prior quarter, and .18% in the same quarter last year.

At December 31, 2022, the allowance for credit losses on loans totaled $150.1 million, or .92% of total loans, and increased $6.8 million compared to the prior quarter. Additionally, the liability for unfunded lending commitments at December 31, 2022 was $33.1 million, an increase of $3.1 million compared to the liability at September 30, 2022.

At December 31, 2022, total non-accrual loans amounted to $8.3 million, an increase of $1.1 million over the previous quarter. At December 31, 2022, the balance of non-accrual loans, which represented .05% of loans outstanding, included business loans of $6.8 million, personal real estate loans of $1.4 million, and business real estate loans of $189 thousand. Loans more than 90 days past due and still accruing interest totaled $15.8 million at December 31, 2022.

Other

During the 4th quarter of 2022, the Company distributed a 5% stock dividend on its common stock and paid a cash dividend of $.25 per common share (as restated for the stock dividend), representing a 6.0% increase over the same period last year. The Company purchased 332,178 shares of treasury stock during the current quarter at an average price of $70.15.

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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