Commerce Bancshares, Inc. announced earnings of $1.07 per share for the three months ended June 30, 2024, compared to $.97 per share in the same quarter last year and $.86 per share in the first quarter of 2024. Net income for the second quarter of 2024 amounted to $139.6 million, compared to $127.8 million in the second quarter of 2023 and $112.7 million in the prior quarter.

For the six months ended June 30, 2024, earnings per share totaled $1.93, compared to $1.88 for the first six months of 2023. Net income amounted to $252.2 million for the six months ended June 30, 2024, compared to $247.2 million in the comparable period last year. For the year to date, the return on average assets was 1.67%, and the return on average equity was 16.98%.

In announcing these results, John Kemper, President and Chief Executive Officer, said, “Our earnings remained strong this quarter, driven by an expanding net interest margin, solid fee income, and well-controlled expenses. Our net interest margin expanded 22 basis points this quarter, attributable to a repositioning of some of our available for sale securities, continued benefit from asset repricing and inflation income on treasury bonds. Interest-bearing deposit costs continue to flatten, increasing just two basis points this quarter. Trust fees and deposit account fees were up 10.6% and 11.9%, respectively, over the same period last year.

“We continue to maintain strong capital and liquidity levels. Credit quality across our entire loan portfolio remains excellent, with non-accrual loans at just 11 basis points of total loans.”

Kemper added, “We are pleased to announce that the Company contributed $5.0 million to the Commerce Bancshares Foundation during the second quarter. This donation underscores our commitment to supporting and empowering the growth and prosperity of our communities. Through our contribution to the Foundation, we look forward to maintaining a lasting positive impact on the organizations who do so much for the areas we serve.”

Second Quarter 2024 Financial Highlights:

• Net interest income was $262.2 million, a $13.3 million increase over the prior quarter. The net yield on interest earning assets increased 22 basis points to 3.55%.

• Non-interest income totaled $152.2 million, an increase of $4.6 million compared to the same quarter last year.

• Trust fees grew $5.0 million, or 10.6%, compared to the same period last year, mostly due to higher private client fees.

• Non-interest expense totaled $232.2 million, an increase of $4.6 million, or 2.0%, compared to the same quarter last year and included a $5.0 million donation to a related charitable foundation.

• Average loan balances totaled $17.2 billion, an increase of .6% compared to the prior quarter.

• Total average available for sale debt securities decreased $695.1 million from the prior quarter to $8.8 billion, at fair value. During the second quarter of 2024, the unrealized loss on available for sale debt securities decreased $173.4 million to $1.1 billion, at period end.

• Investment securities gains included a $177.0 million gain on Visa Inc. stock and a $179.1 million loss on the repositioning of a portion of the Company’s available for sale debt securities portfolio.

• Total average deposits decreased $164.5 million, or .7%, compared to the prior quarter. The average rate paid on interest bearing deposits in the current quarter was 1.99%.

• The ratio of annualized net loan charge-offs to average loans was .23% compared to .21% in the prior quarter.

• The allowance for credit losses on loans decreased $1.9 million during the second quarter to $158.6 million, and the ratio of the allowance for credit losses on loans to total loans was .92%, at June 30, 2024, compared to .93% at March 31, 2024.

• Total assets at June 30, 2024 were $30.6 billion, an increase of $197.3 million, or .6%, compared to the prior quarter.

• For the quarter, the return on average assets was 1.86%, the return on average equity was 18.52%, and the efficiency ratio was 55.9%.

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. Beyond the Midwest, Commerce also maintains commercial offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids and wealth offices in Dallas, Houston, and Naples. Commerce delivers high-touch service and sophisticated financial solutions at regional branches, commercial and wealth 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 Second Quarter Results

June 30, 2024

For the quarter ended June 30, 2024, net income amounted to $139.6 million, compared to $112.7 million in the previous quarter and $127.8 million in the same quarter last year. The increase in net income compared to the previous quarter was primarily the result of higher net interest income and lower non-interest expense. The net yield on interest earning assets increased 22 basis points over the previous quarter to 3.55%. Average loans increased $94.4 million over the previous quarter, while average deposits, borrowings and available for sale debt securities, at fair value, declined $164.5 million, $319.5 million, and $695.1 million, respectively. For the quarter, the return on average assets was 1.86%, the return on average equity was 18.52%, and the efficiency ratio was 55.9%.

Balance Sheet Review

During the 2^nd quarter of 2024, average loans totaled $17.2 billion, an increase of $94.4 million over the prior quarter, and increased $505.4 million, or 3.0%, over the same quarter last year. Compared to the previous quarter, average balances of business and consumer loans grew $106.8 million and $45.2 million, respectively, while business real estate loans declined $61.6 million. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $18.2 million, compared to $7.4 million in the prior quarter.

Total average available for sale debt securities decreased $695.1 million compared to the previous quarter to $8.8 billion, at fair value. The decrease in debt securities was mainly the result of lower average balances of mortgage-backed, asset-backed, state and municipal, and other debt securities, partly offset by higher average balances of U.S. government and federal agency obligations. Most of the changes in the debt securities balances resulted from the completion of a plan to reposition a portion of the portfolio, which was announced in May 2024. During the 2^nd quarter of 2024, the unrealized loss on available for sale debt securities decreased $173.4 million to $1.1 billion, at period end. Also, during the 2^nd quarter of 2024, purchases of securities totaled $928.8 million with a weighted average yield of approximately 4.60%, and sales, maturities and pay downs were $1.7 billion. At June 30, 2024, the duration of the available for sale investment portfolio was 4.0 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months. The Company does not have any investment securities classified as held-to-maturity.

Total average deposits decreased $164.5 million this quarter compared to the previous quarter. The decrease in deposits mostly resulted from a decline of $102.7 million in average balances of certificates of deposit greater than $100,000. Compared to the previous quarter, total average commercial deposits declined $317.0 million, while average consumer deposits increased $136.3 million. The average loans to deposits ratio was 70.7% in the current quarter and 69.9% in the prior quarter. The Company’s average borrowings, which included average customer repurchase agreements of $2.3 billion, decreased $319.5 million to $2.5 billion in the 2^nd quarter of 2024.

Net Interest Income

Net interest income in the 2^nd quarter of 2024 amounted to $262.2 million, an increase of $13.3 million over the previous quarter. On a fully taxable-equivalent (FTE) basis, net interest income for the current quarter increased $13.3 million over the previous quarter to $264.6 million. The increase in net interest income was mostly due to higher interest income on investment securities, loans, and deposits with banks, coupled with lower interest expense on borrowings. The net yield (FTE) on earning assets increased to 3.55%, from 3.33% in the prior quarter.

Compared to the previous quarter, interest income on loans (FTE) increased $2.9 million, due to higher average rates earned on business, consumer, and personal real estate loans. Interest income on loans also increased due to higher average balances of business and consumer loans, partly offset by lower average balances of business real estate loans. The average yield (FTE) on the loan portfolio increased three basis points to 6.30% this quarter.

Interest income on investment securities (FTE) increased $4.7 million over the prior quarter, mostly due to higher rates earned on available for sale debt securities, partly offset by lower average balances of available for sale debt securities. Interest income earned on U.S. government and federal agency securities increased due to higher average balances and rates, which included the impact of $5.9 million in higher inflation income from Treasury inflation-protected securities compared to previous quarter. Additionally, the Company recorded a $740 thousand adjustment to premium amortization at June 30, 2024, which increased interest income to reflect slower forward prepayment speed estimates on mortgage-backed securities but was lower than the $2.0 million adjustment that increased interest income in the prior quarter. The average yield (FTE) on total investment securities was 2.75% in the current quarter, compared to 2.44% in the previous quarter.

Compared to the previous quarter, interest income on deposits with banks increased $2.2 million, due to $161.4 million of higher average balances.

Interest expense decreased $2.6 million, mainly due to lower average borrowing balances, partly offset by higher interest expense on deposits. Interest expense on borrowings decreased $3.0 million due to lower average balances of customer repurchase agreements and federal funds purchased. Interest expense on deposits increased $377 thousand as higher rates paid on deposits were mostly offset by lower average balances. The average rate paid on interest bearing deposits totaled 1.99% in the current quarter compared to 1.97% in the prior quarter. The overall rate paid on interest bearing liabilities was 2.21% in the current and prior quarter.

Non-Interest Income

In the 2^nd quarter of 2024, total non-interest income amounted to $152.2 million, an increase of $4.6 million, or 3.1%, over the same period last year and an increase of $3.4 million over the prior quarter. The increase in non-interest income compared to the same period last year was mainly due to higher trust fees, capital market fees, and deposit account fees, partly offset by lower bank card fees and letter of credit fees. The increase in non-interest income compared to the prior quarter was mainly due to higher deposit account fees, trust fees, capital market fees and swap fees, partly offset by lower tax credit sales income. Additionally, a decrease of $1.1 million in fair value adjustments was recorded on the Company’s deferred compensation plan, 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 $2.2 million, or 4.5%, compared to the same period last year, and increased $547 thousand compared to the prior quarter. Net corporate card fees decreased $3.0 million, or 10.3%, compared to the same quarter of last year mainly due to lower interchange fees and higher rewards expense. Net merchant fees increased $506 thousand, or 9.4%, due to higher interchange fees, partly offset by higher network expense. Net debit card fees increased $43 thousand, or .4%, while net credit card fees increased $221 thousand, or 5.8%. Total net bank card fees this quarter were comprised of fees on corporate card ($26.2 million), debit card ($11.4 million), merchant ($5.9 million) and credit card ($4.0 million) transactions.

In the current quarter, trust fees increased $5.0 million, or 10.6%, over the same period last year, mostly resulting from higher private client fees. Compared to the same period last year, deposit account fees increased $2.7 million, or 11.9%, mostly due to higher corporate cash management fees, while capital market fees increased $1.8 million, or 61.6%, mostly due to higher underwriting fees.

Other non-interest income decreased compared to the same period last year primarily due to lower letter of credit fees and swap fees of $2.3 million and $919 thousand, respectively. For the 2^nd quarter of 2024, non-interest income comprised 36.7% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities gains of $3.2 million in the current quarter, compared to losses of $259 thousand in the prior quarter and gains of $3.4 million in the 2^nd quarter of 2023. Net securities gains in the current quarter resulted primarily from gains of $177.0 million recognized on Visa common stock. During the second quarter of 2024, the Company sold 436 thousand shares of Visa Class A common stock (converted from 109 thousand shares of Visa Class C common stock) at an average price of $274.91. As of June 30, 2024, the Company has sold approximately two thirds of the Visa Class C shares it received from the Visa exchange offer. In addition, net gains of $4.1 million were recorded on the Company’s portfolio of private equity investments. These net gains were mostly offset by losses of $179.1 million realized on sales of available for sale debt securities resulting from the completion of the Company’s plan to reposition a portion of its available for sale debt securities portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $232.2 million, compared to $227.6 million in the same period last year and $245.7 million in the prior quarter. The increase in non-interest expense compared to the same period last year was mainly due to higher salaries expense, data processing and software expense, and other expense, partly offset by lower marketing and deposit insurance expense. The decrease in non-interest expense compared to the prior quarter was mainly due to lower deposit insurance expense, employee benefits expense, and litigation settlement expense recorded in the prior quarter that did not reoccur in the current quarter. These decreases were partly offset by higher salaries expense and a donation to a related charitable foundation.

Compared to the 2^nd quarter of last year, salaries and employee benefits expense increased $3.7 million, or 2.5%, mostly due to higher full-time salaries expense of $3.8 million, and other salaries expense of $1.0 million, partly offset by lower medical expense of $1.5 million. Full-time equivalent employees totaled 4,724 and 4,680 at June 30, 2024 and 2023, respectively.

Compared to the same period last year, data processing and software expense increased $2.8 million due to increased costs for service providers. This increase was partly offset by a decrease in deposit insurance expense of $1.8 million, mostly due to a $1.2 million accrual adjustment to the FDIC’s special assessment and lower marketing expense of $1.0 million. Other expense included a $5.0 million donation to a related charitable foundation in the current quarter, partly offset by deconversion expense of $2.1 million recorded in the same period last year.

Income Taxes

The effective tax rate for the Company was 21.7% in the current quarter, 21.9% in the previous quarter, and 22.0% in the 2^nd quarter of 2023.

Credit Quality

Net loan charge-offs in the 2^nd quarter of 2024 amounted to $9.8 million, compared to $8.9 million in the prior quarter and $6.5 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .23% in the current quarter, .21% in the previous quarter, and .16% in the 2^nd quarter of last year. Compared to the prior quarter, net loan charge-offs on business and consumer credit card loans increased $599 thousand and $311 thousand, respectively.

In the 2^nd quarter of 2024, annualized net loan charge-offs on average consumer credit card loans were 4.91%, compared to 4.60% in the previous quarter and 3.38% in the same quarter last year. Consumer loan net charge-offs were .34% of average consumer loans in the current quarter, .38% in the prior quarter, and .24% in the same quarter last year.

At June 30, 2024, the allowance for credit losses on loans totaled $158.6 million, or .92% of total loans, and decreased $1.9 million compared to the prior quarter. Additionally, the liability for unfunded lending commitments at June 30, 2024 was $20.7 million, a decrease of $2.4 million compared to the liability at March 31, 2024.

At June 30, 2024, total non-accrual loans amounted to $19.3 million, an increase of $13.5 million over the previous quarter. The increase in non-accrual loans was mostly due to a senior living business real estate loan that was moved to non-accrual status during the second quarter of 2024. At June 30, 2024, the balance of non-accrual loans, which represented .11% of loans outstanding, included business loans of $504 thousand, revolving home equity loans of $2.0 million, personal real estate loans of $1.8 million, and business real estate loans of $15.1 million. Loans more than 90 days past due and still accruing interest totaled $18.6 million at June 30, 2024.

Other

During the 2^nd quarter of 2024, the Company paid a cash dividend of $.27 per common share, representing a 5.1% increase over the same period last year. The Company purchased 685,685 shares of treasury stock during the current quarter at an average price of $55.21.

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. Additional information about risks and uncertainties is included in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections within the Company's Annual Report on Form 10-K.

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