Commerce Bancshares, Inc. Reports Third Quarter Earnings Per Share Of $1.11

Rhea-AI Summary

Commerce Bancshares, Inc. (NASDAQ: CBSH) reported earnings of $1.11 per share for Q3 2020, up from $0.93 in Q3 2019 and $0.34 in Q2 2020. Net income reached $132.4 million, a significant rise from $39.9 million in the previous quarter. The return on average assets was 1.71%, with an efficiency ratio of 55.0%. Year-to-date earnings per share is $1.89, down from $2.65 last year. The bank's net interest income increased by $12.9 million due to a larger balance sheet and low funding costs, alongside record levels in trust and mortgage banking fees.

Positive

• Earnings per share increased to $1.11, a 19.4% YoY growth.
• Net income rose to $132.4 million, up from $39.9 million in Q2 2020.
• Net interest income grew by $12.9 million compared to the previous quarter.
• Trust and mortgage banking fees set record highs.

Negative

• Year-to-date earnings per share decreased to $1.89 from $2.65 YoY.
• Non-performing assets increased from $23.1 million to $40.3 million.
• Net loan charge-offs increased to $7.6 million this quarter.

KANSAS CITY, Mo.--(BUSINESS WIRE)--Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $1.11 per common share for the three months ended September 30, 2020, compared to $.93 per share in the same quarter last year and $.34 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. (net income) for the third quarter of 2020 amounted to $132.4 million, compared to $109.2 million in the third quarter of 2019 and $39.9 million in the prior quarter. For the quarter, the return on average assets was 1.71%, the return on average common equity was 15.21% and the efficiency ratio was 55.0%.

For the nine months ended September 30, 2020, earnings per common share totaled $1.89 compared to $2.65 for the first nine months of 2019. Net income amounted to $224.2 million for the nine months ended September 30, 2020 compared to $314.4 million in the same period last year. Year to date, the return on average assets was 1.04% and the return on average common equity was 8.93%.

In announcing these results, John Kemper, Chief Executive Officer, said, “We are pleased to report a healthy rebound in earnings this quarter. Net income grew significantly compared to the second quarter, driven by low provision expense and by increases in net interest income, fee income, and investment securities gains. Compared to the prior quarter, net interest income grew $12.9 million supported by our larger balance sheet and historically low funding costs. Fee income from our bank card, trust and mortgage banking businesses rebounded nicely from the prior quarter. While our bank card fees have not yet fully recovered from the impact of COVID-19, trust and mortgage banking fees were at record levels. Prudent expense management remains in focus as we prepare for a prolonged low interest rate environment. We continued our efforts of providing relief to customers who have been impacted by COVID-19. Loans on active deferral declined significantly throughout the quarter. Fewer customers requested first-time relief, and just a small percentage of our customers required extensions of their initial relief requests. We remain cautiously optimistic about the recovery of the economy and are encouraged by the resiliency of our customers and communities.”

Mr. Kemper continued, “Net loan charge-offs this quarter totaled $7.6 million, compared to $8.4 million in the prior quarter and $11.5 million in the third quarter of 2019. The ratio of annualized net loan charge-offs to average loans was .18% in the current quarter, .21% in the prior quarter and .32% in the third quarter of last year. Net loan charge-offs on commercial loans totaled $194 thousand this quarter compared to $3.2 million in the prior quarter. Net loan charge-offs on personal banking loans increased $2.2 million to $7.4 million. Non-performing assets increased this quarter from $23.1 million to $40.3 million. At September 30, 2020, the allowance for credit losses on loans decreased slightly to $236.4 million, partly due to an improved economic forecast utilized in our CECL model compared to the prior quarter.”

Total assets at September 30, 2020 were $31.5 billion, total loans were $16.4 billion, and total deposits were $25.7 billion. During the quarter, the Company paid a common cash dividend of $.27 per share, representing an 8.9% increase over the rate paid in 2019, and also paid an annualized 6% cash dividend on its preferred stock. On September 1, 2020, the Company redeemed all outstanding shares of its preferred stock.

Commerce Bancshares, Inc. is a regional bank holding company offering a full line of banking services, including payment solutions, investment management and securities brokerage. Commerce Bank, a subsidiary of Commerce Bancshares, Inc., leverages more than 150 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, including management's discussion of third quarter results, is posted to the Company's web site at www.commercebank.com.

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)		September 30, 2020			June 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
FINANCIAL SUMMARY
Net interest income		$215,962			$203,057			$203,512			$620,084			$618,634
Non-interest income		129,572			117,515			132,743			370,750			381,242
Total revenue		345,534			320,572			336,255			990,834			999,876
Investment securities gains (losses), net		16,155			(4,129)			4,909			(1,275)			3,874
Provision for credit losses		3,101			80,539			10,963			141,593			35,232
Non-interest expense		190,858			187,512			191,020			572,068			572,224
Income before taxes		167,730			48,392			139,181			275,898			396,294
Income taxes		34,375			9,661			29,101			54,209			80,860
Non-controlling interest (income) expense		907			(1,132)			838			(2,479)			1,083
Net income attributable to Commerce Bancshares, Inc.		132,448			39,863			109,242			224,168			314,351
Preferred stock dividends		7,466			2,250			2,250			11,966			6,750
Net income available to common shareholders		$124,982			$37,613			$106,992			$212,202			$307,601
Earnings per common share:
Net income — basic		$1.12			$.34			$.93			$1.90			$2.65
Net income — diluted		$1.11			$.34			$.93			$1.89			$2.65
Effective tax rate		20.61		%	19.51		%	21.04		%	19.47		%	20.46		%
Tax equivalent net interest income		$219,118			$206,253			$206,958			$629,773			$629,265
Average total interest earning assets (1)		$	29,352,970		$	28,193,312		$	23,947,084		$	27,419,514		$	23,920,745
Diluted wtd. average shares outstanding		110,899,197			110,896,858			113,249,070			111,056,754			114,758,916
RATIOS
Average loans to deposits (2)		66.23		%	69.22		%	72.48		%	69.12		%	71.47		%
Return on total average assets		1.71			.54			1.72			1.04			1.68
Return on average common equity (3)		15.21			4.77			14.21			8.93			14.11
Non-interest income to total revenue		37.50			36.66			39.48			37.42			38.13
Efficiency ratio (4)		55.00			58.10			56.66			57.37			57.08
Net yield on interest earning assets		2.97			2.94			3.43			3.07			3.52
EQUITY SUMMARY
Cash dividends per common share		$.270			$.270			$.248			$.810			$.744
Cash dividends on common stock		$30,174			$30,174			$27,993			$90,640			$85,533
Cash dividends on preferred stock (7)		$7,466			$2,250			$2,250			$11,966			$6,750
Book value per common share (5)		$29.64			$28.81			$26.27
Market value per common share (5)		$56.29			$59.47			$57.76
High market value per common share		$62.09			$69.77			$58.90
Low market value per common share		$53.03			$48.06			$52.05
Common shares outstanding (5)		111,532,580			111,533,315			112,732,983
Tangible common equity to tangible assets (6)		10.11		%	10.12		%	10.95		%
Tier I leverage ratio		9.39		%	9.88		%	11.32		%
OTHER QTD INFORMATION
Number of bank/ATM locations		308			312			316
Full-time equivalent employees		4,825			4,856			4,873

(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 available to common shareholders divided by average total equity less preferred stock.
(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 preferred stock, goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).
(7)		For the period ended September 30, 2020, preferred stock dividends includes $5.2 million related to the preferred stock redemption. The $5.2 million is the excess of the redemption costs over the book value of the preferred stock and is considered a dividend.
All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 2019.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
		For the Three Months Ended										For the Nine Months Ended
(Unaudited) (In thousands, except per share data)		September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		September 30, 2020		September 30, 2019
Interest income		$223,114		$213,323		$221,485		$226,665		$231,743		$657,922		$698,020
Interest expense		7,152		10,266		20,420		24,006		28,231		37,838		79,386
Net interest income		215,962		203,057		201,065		202,659		203,512		620,084		618,634
Provision for credit losses		3,101		80,539		57,953		15,206		10,963		141,593		35,232
Net interest income after credit losses		212,861		122,518		143,112		187,453		192,549		478,491		583,402
NON-INTEREST INCOME
Bank card transaction fees		37,873		33,745		40,200		41,079		44,510		111,818		126,800
Trust fees		40,769		37,942		39,965		40,405		39,592		118,676		115,223
Deposit account charges and other fees		23,107		22,279		23,677		24,974		24,032		69,063		71,009
Capital market fees		3,194		3,772		3,790		2,536		1,787		10,756		5,610
Consumer brokerage services		4,011		3,011		4,077		4,139		4,030		11,099		11,665
Loan fees and sales		9,769		4,649		3,235		3,465		4,755		17,653		12,302
Other		10,849		12,117		8,719		26,863		14,037		31,685		38,633
Total non-interest income		129,572		117,515		123,663		143,461		132,743		370,750		381,242
INVESTMENT SECURITIES GAINS (LOSSES), NET		16,155		(4,129)		(13,301)		(248)		4,909		(1,275)		3,874
NON-INTEREST EXPENSE
Salaries and employee benefits		127,308		126,759		128,937		126,901		123,836		383,004		366,026
Net occupancy		12,058		11,269		11,748		12,218		12,293		35,075		34,939
Equipment		4,737		4,755		4,821		4,859		4,941		14,313		14,202
Supplies and communication		4,141		4,427		4,658		4,851		5,106		13,226		15,543
Data processing and software		23,610		23,837		23,555		23,934		23,457		71,002		68,965
Marketing		4,926		3,801		5,979		3,951		6,048		14,706		17,963
Other		14,078		12,664		14,000		18,460		15,339		40,742		54,586
Total non-interest expense		190,858		187,512		193,698		195,174		191,020		572,068		572,224
Income before income taxes		167,730		48,392		59,776		135,492		139,181		275,898		396,294
Less income taxes		34,375		9,661		10,173		28,214		29,101		54,209		80,860
Net income		133,355		38,731		49,603		107,278		110,080		221,689		315,434
Less non-controlling interest expense (income)		907		(1,132)		(2,254)		398		838		(2,479)		1,083
Net income attributable to Commerce Bancshares, Inc.		132,448		39,863		51,857		106,880		109,242		224,168		314,351
Less preferred stock dividends		7,466		2,250		2,250		2,250		2,250		11,966		6,750
Net income available to common shareholders		$124,982		$37,613		$49,607		$104,630		$106,992		$212,202		$307,601
Net income per common share — basic		$1.12		$.34		$.44		$.94		$.93		$1.90		$2.65
Net income per common share — diluted		$1.11		$.34		$.44		$.93		$.93		$1.89		$2.65
OTHER INFORMATION
Return on total average assets		1.71	%	.54	%	.80	%	1.65	%	1.72	%	1.04	%	1.68	%
Return on average common equity (1)		15.21		4.77		6.48		13.90		14.21		8.93		14.11
Efficiency ratio (2)		55.00		58.10		59.17		56.29		56.66		57.37		57.08
Effective tax rate		20.61		19.51		16.40		20.88		21.04		19.47		20.46
Net yield on interest earning assets		2.97		2.94		3.33		3.36		3.43		3.07		3.52
Tax equivalent net interest income		$219,118		$206,253		$204,402		$206,156		$206,958		$629,773		$629,265

(1)		Annualized net income available to common shareholders divided by average total equity less preferred stock.
(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)		September 30, 2020			June 30, 2020			September 30, 2019
ASSETS
Loans
Business		$	6,683,413		$	6,858,217		$	5,393,268
Real estate — construction and land		1,009,729			932,022			932,737
Real estate — business		2,993,192			2,941,163			2,833,146
Real estate — personal		2,753,867			2,690,542			2,226,663
Consumer		2,006,360			1,966,707			1,953,690
Revolving home equity		324,203			334,627			349,111
Consumer credit card		647,893			666,597			766,743
Overdrafts		2,270			5,179			7,236
Total loans		16,420,927			16,395,054			14,462,594
Allowance for credit losses on loans		(236,360)			(240,744)			(160,682)
Net loans		16,184,567			16,154,310			14,301,912
Loans held for sale		39,483			12,785			20,064
Investment securities:
Available for sale debt securities		11,539,061			10,317,427			8,660,419
Trading debt securities		25,805			28,813			35,918
Equity securities		4,203			4,128			4,186
Other securities		122,532			117,761			147,211
Total investment securities		11,691,601			10,468,129			8,847,734
Federal funds sold and short-term securities purchased under agreements to resell		2,275			—			2,850
Long-term securities purchased under agreements to resell		850,000			850,000			850,000
Interest earning deposits with banks		1,171,697			1,404,968			344,129
Cash and due from banks		357,616			391,268			512,254
Premises and equipment — net		377,853			368,565			365,949
Goodwill		138,921			138,921			138,921
Other intangible assets — net		7,183			7,179			9,139
Other assets		632,621			699,996			483,527
Total assets		$	31,453,817		$	30,496,121		$	25,876,479
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	10,727,827		$	9,700,261		$	6,816,527
Savings, interest checking and money market		12,983,505			12,792,993			11,424,404
Certificates of deposit of less than $100,000		556,870			590,635			627,630
Certificates of deposit of $100,000 and over		1,433,577			1,443,078			1,441,590
Total deposits		25,701,779			24,526,967			20,310,151
Federal funds purchased and securities sold under agreements to repurchase		1,653,064			1,740,438			1,641,274
Other borrowings		782			1,475			257,383
Other liabilities		791,928			869,072			561,657
Total liabilities		28,147,553			27,137,952			22,770,465
Stockholders’ equity:
Preferred stock		—			144,784			144,784
Common stock		563,978			563,978			559,432
Capital surplus		2,140,410			2,136,874			2,042,643
Retained earnings		326,890			232,082			463,231
Treasury stock		(69,050)			(69,112)			(251,663)
Accumulated other comprehensive income		343,435			349,261			144,173
Total stockholders’ equity		3,305,663			3,357,867			3,102,600
Non-controlling interest		601			302			3,414
Total equity		3,306,264			3,358,169			3,106,014
Total liabilities and equity		$	31,453,817		$	30,496,121		$	25,876,479

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)	For the Three Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
ASSETS:
Loans:
Business	$	6,709,200		$	6,760,827		$	5,493,657		$	5,362,020		$	5,263,312
Real estate — construction and land	974,346			895,648			924,086			901,367			920,206
Real estate — business	2,989,652			2,962,076			2,853,632			2,820,189			2,883,379
Real estate — personal	2,722,300			2,582,484			2,390,716			2,283,530			2,175,156
Consumer	1,992,314			1,944,265			1,950,491			1,961,631			1,924,434
Revolving home equity	329,361			343,210			350,256			347,527			354,040
Consumer credit card	646,185			663,911			727,569			749,056			763,377
Overdrafts	2,689			2,912			4,044			18,322			9,240
Total loans	16,366,047			16,155,333			14,694,451			14,443,642			14,293,144
Allowance for credit losses on loans	(240,286)			(171,616)			(139,482)			(159,776)			(160,387)
Net loans	16,125,761			15,983,717			14,554,969			14,283,866			14,132,757
Loans held for sale	24,728			6,363			12,875			15,363			19,882
Investment securities:
U.S. government and federal agency obligations	770,361			776,240			802,556			826,702			825,544
Government-sponsored enterprise obligations	102,749			114,518			134,296			184,973			181,929
State and municipal obligations	1,767,526			1,285,427			1,222,595			1,207,584			1,172,259
Mortgage-backed securities	6,259,926			5,325,720			4,685,782			4,685,794			4,712,508
Asset-backed securities	1,520,988			1,342,518			1,182,556			1,258,297			1,297,685
Other debt securities	514,166			406,665			321,733			331,167			334,218
Unrealized gain (loss) on debt securities	368,154			281,457			191,275			149,591			152,706
Total available for sale debt securities	11,303,870			9,532,545			8,540,793			8,644,108			8,676,849
Trading debt securities	27,267			31,981			34,055			32,518			29,622
Equity securities	4,193			4,137			4,273			4,200			4,705
Other securities	120,253			139,250			144,096			141,501			134,896
Total investment securities	11,455,583			9,707,913			8,723,217			8,822,327			8,846,072
Federal funds sold and short-term securities purchased under agreements to resell	337			92			326			714			1,080
Long-term securities purchased under agreements to resell	849,994			850,000			850,000			849,986			713,030
Interest earning deposits with banks	1,024,435			1,755,068			601,420			390,134			226,582
Other assets	1,389,683			1,461,528			1,368,464			1,315,395			1,292,191
Total assets	$	30,870,521		$	29,764,681		$	26,111,271		$	25,677,785		$	25,231,594
LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	9,801,562		$	8,843,408		$	6,615,108		$	6,552,862		$	6,290,036
Savings	1,193,079			1,111,397			952,709			924,282			924,581
Interest checking and money market	11,731,494			11,441,694			10,777,400			10,618,347			10,409,111
Certificates of deposit of less than $100,000	573,207			605,136			622,840			626,944			620,138
Certificates of deposit of $100,000 and over	1,447,968			1,346,069			1,299,443			1,434,309			1,503,805
Total deposits	24,747,310			23,347,704			20,267,500			20,156,744			19,747,671
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1,855,971			1,991,971			1,990,051			1,836,982			1,884,939
Other borrowings	1,225			345,162			161,698			94,471			77,248
Total borrowings	1,857,196			2,337,133			2,151,749			1,931,453			1,962,187
Other liabilities	899,890			763,524			466,980			458,094			390,560
Total liabilities	27,504,396			26,448,361			22,886,229			22,546,291			22,100,418
Equity	3,366,125			3,316,320			3,225,042			3,131,494			3,131,176
Total liabilities and equity	$	30,870,521		$	29,764,681		$	26,111,271		$	25,677,785		$	25,231,594

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES
(Unaudited)	For the Three Months Ended
	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
ASSETS:
Loans:
Business (1)	2.95	%	2.91	%	3.50	%	3.59	%	3.85	%
Real estate — construction and land	3.74		3.95		4.78		5.05		5.46
Real estate — business	3.53		3.71		4.16		4.22		4.42
Real estate — personal	3.56		3.69		3.83		3.85		3.91
Consumer	4.19		4.48		4.78		4.76		4.88
Revolving home equity	3.29		3.50		4.61		4.76		5.17
Consumer credit card	11.40		11.76		12.26		12.11		12.42
Overdrafts	—		—		—		—		—
Total loans	3.69		3.80		4.39		4.47		4.71
Loans held for sale	4.25		8.03		6.15		5.32		6.15
Investment securities:
U.S. government and federal agency obligations	3.71		.46		2.09		2.16		2.36
Government-sponsored enterprise obligations	2.17		3.51		4.19		2.17		2.69
State and municipal obligations (1)	2.53		2.97		3.11		3.05		3.14
Mortgage-backed securities	1.95		2.17		2.37		2.72		2.61
Asset-backed securities	1.90		2.25		2.63		2.62		2.80
Other debt securities	2.35		2.49		2.94		2.82		2.63
Total available for sale debt securities	2.18		2.18		2.54		2.69		2.69
Trading debt securities (1)	1.66		2.93		2.52		2.81		2.91
Equity securities (1)	47.15		48.42		46.78		49.40		35.67
Other securities (1)	6.74		4.36		5.31		6.58		6.19
Total investment securities	2.24		2.24		2.61		2.78		2.76
Federal funds sold and short-term securities purchased under agreements to resell	—		—		2.47		2.22		2.57
Long-term securities purchased under agreements to resell	5.26		5.08		3.53		2.26		2.01
Interest earning deposits with banks	.10		.10		.86		1.61		2.17
Total interest earning assets	3.07		3.09		3.66		3.75		3.90
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.09		.09		.11		.11		.11
Interest checking and money market	.10		.13		.30		.35		.38
Certificates of deposit of less than $100,000	.71		.93		1.15		1.16		1.11
Certificates of deposit of $100,000 and over	.69		1.08		1.62		1.79		1.99
Total interest bearing deposits	.18		.25		.45		.52		.58
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	.09		.12		.96		1.20		1.74
Other borrowings	—		.82		.82		2.05		2.33
Total borrowings	.09		.22		.95		1.25		1.76
Total interest bearing liabilities	.17	%	.25	%	.52	%	.61	%	.73	%
Net yield on interest earning assets	2.97	%	2.94	%	3.33	%	3.36	%	3.43	%

(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 Nine Months Ended
(Unaudited) (In thousands, except per share data)		September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			September 30, 2020			September 30, 2019
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period		$	240,744		$	171,653		$	160,682		$	160,682		$	161,182		$	160,682		$	159,932
Adoption of ASU 2016-13		—			—			(21,039)			—			—			(21,039)			—
Provision for credit losses on loans		3,200			77,491			42,868			15,206			10,963			123,559			35,232
Net charge-offs (recoveries):
Commercial portfolio:
Business		208			3,249			(373)			3,036			335			3,084			1,066
Real estate — construction and land		(1)			—			—			—			—			(1)			(117)
Real estate — business		(13)			(6)			(21)			35			(44)			(40)			(95)
		194			3,243			(394)			3,071			291			3,043			854
Personal banking portfolio:
Consumer credit card		7,263			3,584			9,157			8,829			8,568			20,004			26,592
Consumer		211			1,362			1,711			2,838			2,069			3,284			5,716
Overdraft		200			316			426			507			446			942			1,016
Real estate — personal		(198)			(71)			(4)			6			(30)			(273)			50
Revolving home equity		(86)			(34)			(38)			(45)			119			(158)			254
		7,390			5,157			11,252			12,135			11,172			23,799			33,628
Total net loan charge-offs		7,584			8,400			10,858			15,206			11,463			26,842			34,482
Balance at end of period		$	236,360		$	240,744		$	171,653		$	160,682		$	160,682		$	236,360		$	160,682
LIABILITY FOR UNFUNDED LENDING COMMITMENTS		$	35,200		$	35,299		$	32,250		$	1,075		$	1,075
NET CHARGE-OFF RATIOS (1)
Commercial portfolio:
Business		.01		%	.19		%	(.03		%)	.22		%	.03		%	.07		%	.03		%
Real estate — construction and land		—			—			—			—			—			—			(.02)
Real estate — business		—			—			—			—			(.01)			—			—
		.01			.12			(.02)			.13			.01			.04			.01
Personal banking portfolio:
Consumer credit card		4.47			2.17			5.06			4.68			4.45			3.93			4.62
Consumer		.04			.28			.35			.57			.43			.22			.40
Overdraft		29.59			43.65			42.37			10.98			19.15			39.16			22.16
Real estate — personal		(.03)			(.01)			—			—			(.01)			(.01)			—
Revolving home equity		(.10)			(.04)			(.04)			(.05)			.13			(.06)			.09
		.52			.37			.83			.90			.85			.57			.86
Total		.18		%	.21		%	.30		%	.42		%	.32		%	.23		%	.33		%
CREDIT QUALITY RATIOS
Non-performing assets to total loans		.25		%	.14		%	.07		%	.07		%	.08		%
Non-performing assets to total assets		.13			.08			.04			.04			.05
Allowance for credit losses on loans to total loans(2)		1.44			1.47			1.14			1.09			1.11
NON-PERFORMING ASSETS
Non-accrual loans:
Business		$	37,295		$	19,034		$	7,356		$	7,489		$	7,753
Real estate — construction and land		1			1			2			2			3
Real estate — business		1,063			1,921			1,532			1,030			2,359
Real estate — personal		1,911			1,679			1,743			1,699			1,618
Total		40,270			22,635			10,633			10,220			11,733
Foreclosed real estate		57			422			422			365			502
Total non-performing assets		$	40,327		$	23,057		$	11,055		$	10,585		$	12,235
Loans past due 90 days and still accruing interest		$	14,436		$	24,583		$	16,520		$	19,859		$	16,308

(1)		As a percentage of average loans (excluding loans held for sale).
(2)		Excluding PPP loans, the allowance for credit losses on loans to total loans was 1.59% and 1.62% as of September 30, 2020 and June 30, 2020, respectively.

COMMERCE BANCSHARES, INC.

Management Discussion of Third Quarter Results

September 30, 2020

For the quarter ended September 30, 2020, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $132.4 million, compared to $39.9 million in the previous quarter and $109.2 million in the same quarter last year. The increase in net income over the previous quarter was primarily the result of a significant decrease in the provision for credit losses, coupled with higher net securities gains, net interest income and non-interest income, partly offset by higher income taxes. The economic forecast used to estimate the allowance for credit losses in September was slightly more optimistic than the forecast utilized in June, which resulted in no additional increase to the allowance for credit losses as of September 30, 2020, and significantly decreased the provision for credit losses this quarter, compared to the prior quarter. Net interest income increased this quarter and the net interest margin increased three basis points, partly due to an increase of $6.3 million in inflation income on our Treasury inflation-protected securities (TIPs). Excluding TIPs inflation income, the net yield on interest earning assets declined five basis points. Average loans increased $210.7 million over the previous quarter, while average available for sale investment securities grew $1.8 billion, and average deposits increased $1.4 billion. For the quarter, the return on average assets was 1.71%, the return on average common equity was 15.21%, and the efficiency ratio was 55.0%.

Balance Sheet Review

During the 3^rd quarter of 2020, average loans totaled $16.4 billion, and increased $210.7 million over the prior quarter, and grew $2.1 billion, or 14.5%, over the same quarter last year. Period end loans grew $25.9 million over the prior quarter and $2.0 billion over September 30, 2019. Compared to the previous quarter, average loan growth was primarily driven by increases in personal real estate, construction and land, and consumer loans of $139.8 million, $78.7 million, and $48.0 million, respectively. This growth was partly offset by a decline in business loans of $51.6 million. The period-end balance of Paycheck Protection Loans (PPP) loans (included in business loans) was approximately $1.5 billion at both September 30, 2020 and June 30, 2020, but the average PPP loan balance at September 30, 2020 increased $261.6 million compared to the prior quarter. Growth in personal real estate loan balances was due to a continuation of strong demand for residential mortgage loans in this low interest rate environment. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $98.9 million, compared to $832 thousand in the prior quarter.

Total average available for sale debt securities increased $1.8 billion over the previous quarter to $11.3 billion, at fair value. The increase in investment securities was mainly the result of growth in mortgage-backed and state and municipal securities. During the quarter, purchases of securities totaled $2.3 billion with a weighted average yield of approximately 1.42%. Sales, maturities and pay downs were $1.0 billion. At September 30, 2020, the duration of the investment portfolio was 3.4 years, and maturities and pay downs of approximately $1.7 billion are expected to occur during the next 12 months.

Total average deposits increased $1.4 billion this quarter compared to the previous quarter. The increase in deposits resulted from growth in demand ($958.2 million), interest checking and money market ($289.8 million), savings deposits ($81.7 million), and certificates of deposit ($70.0 million). Compared to the previous quarter, total average commercial, consumer and wealth deposits (including private banking) grew $840.8 million, $237.5 million and $286.1 million, respectively. The average loans to deposits ratio was 66.2% in the current quarter and 69.2% in the prior quarter. The Company’s average borrowings, which includes customer repurchase agreements, were $1.9 billion in the 3^rd quarter of 2020 and $2.3 billion in the prior quarter.

Net Interest Income

Net interest income in the 3^rd quarter of 2020 amounted to $216.0 million, an increase of $12.9 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $12.9 million over the previous quarter to $219.1 million. The increase in net interest income was mainly due to higher income on interest earning assets, supplemented by lower interest expense on interest bearing liabilities. The Company recorded a $1.0 million adjustment to premium amortization on mortgage-backed securities for prepayment speed changes, which increased interest income this quarter. The net yield on earning assets (tax equivalent) increased to 2.97%, compared to 2.94% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $794 thousand, mostly as a result of lower yields on loans, mainly business real estate and consumer banking loans, and lower average balances of consumer credit card loans. Growth in average personal real estate, construction and consumer loan balances and higher yields on business loans increased net interest income and partially offset the impact of lower yields. The average tax-equivalent yield on the loan portfolio declined to 3.69%, compared to 3.80% in the previous quarter.

Interest income on investment securities (tax equivalent) increased $10.1 million over the previous quarter, mainly due to higher average balances. Decreasing rates on the investment securities portfolio were entirely offset by higher interest income earned on U.S. government and federal agency securities as TIPs inflation income grew $6.3 million this quarter. The yield on total investment securities was 2.24% in both the current and previous quarters.

Interest costs on deposits totaled 18 basis points in the 3^rd quarter of 2020, compared to 25 basis points in the prior quarter. Interest expense on deposits decreased $2.2 million this quarter compared to the previous quarter mainly due to lower rates paid on all deposit categories. Borrowing costs decreased $880 thousand this quarter due to lower average balances of Federal Home Loan Bank borrowings and lower rates paid on borrowings, mainly securities sold under agreements to repurchase. The overall rate paid on interest bearing liabilities was .17% in the current quarter, compared to .25% in the prior quarter.

Non-Interest Income

In the 3^rd quarter of 2020, total non-interest income amounted to $129.6 million, a decrease of $3.2 million, or 2.4%, compared to the same period last year and increased $12.1 million, or 10.3%, compared to the prior quarter. The decrease in non-interest income from the same period last year was mainly due to lower bank card fees, partly offset by growth in loan fees and sales.

Total net bank card fees in the current quarter decreased $6.6 million, or 14.9%, from the same period last year, and increased $4.1 million, or 12.2%, compared to the prior quarter. Net corporate card fees decreased $5.6 million from the same quarter of last year mainly due to lower transaction volume. Net debit card fees decreased $769 thousand, or 7.3%, mainly due to lower interchange income. Net merchant income increased $56 thousand, or 1.2%, while net credit card fees decreased $283 thousand, or 7.8%, due to lower fee income, partly offset by lower rewards expense. Total net bank card fees this quarter were comprised of fees on corporate card ($20.2 million), debit card ($9.7 million), merchant ($4.6 million) and credit card ($3.4 million) transactions.

In the current quarter, trust fees increased $1.2 million, or 3.0%, over the same period last year, resulting from higher private client fee income. Compared to the same period last year, deposit account fees decreased $925 thousand, or 3.8%, mainly due to lower overdraft and return item fees, partly offset by an increase in corporate cash management fees. Additionally, capital market fees grew $1.4 million, or 78.7%, while loan fees and sales, mostly mortgage banking revenue, grew $5.0 million, or 105.4%, over amounts recorded in the same quarter last year.

Other non-interest income decreased in the 3^rd quarter of 2020 compared to the previous quarter mainly due to lower cash sweep commissions, swap fees, and gains on sales of assets. These decreases were partly offset by increases in tax credit sales fees. For the 3^rd quarter of 2020, non-interest income comprised 37.5% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities gains of $16.2 million in the current quarter, compared to losses of $4.1 million in the prior quarter and gains of $4.9 million in the 3^rd quarter of 2019. Net securities gains in the current quarter primarily resulted from gains of $13.4 million on the sales of mortgage-backed securities coupled with unrealized gains of $2.4 million in the Company’s private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $190.9 million, compared to $191.0 million in the same period last year and $187.5 million in the prior quarter. The decrease in non-interest expense compared to the same period last year was mainly due to lower travel and entertainment, marketing, and supplies and communication expense. These decreases were partially offset by higher salaries and employee benefits expense.

Compared to the 3^rd quarter of last year, salaries and employee benefits expense increased $3.5 million, or 2.8%, driven mainly by growth in full-time salary costs, incentive compensation expense, and medical costs. Full-time equivalent employees totaled 4,825 and 4,873 at September 30, 2020 and 2019, respectively.

For the current quarter compared to the same quarter of last year, marketing expense decreased $1.1 million, or 18.6%. Supplies and communication expense decreased $965 thousand due to lower supplies, postage and bank card issuance expense. Other non-interest expense decreased mainly due to a $2.9 million decrease in travel and entertainment expense. FDIC insurance expense, also within other non-interest expense, increased due to higher deposit balances during the current quarter than in the 3^rd quarter of 2019.

Income Taxes

The effective tax rate for the Company was 20.6% in the current quarter, 19.5% in the previous quarter, and 21.0% in the 3^rd quarter of 2019.

Credit Quality

Net loan charge-offs in the 3^rd quarter of 2020 amounted to $7.6 million, compared to $8.4 million in the prior quarter and $11.5 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .18% in the current quarter, .21% in the previous quarter, and .32% in the 3^rd quarter of last year. Compared to the prior quarter, net loan charge-offs on commercial loans decreased $3.0 million to $194 thousand, while net loan charge-offs on personal banking loans increased $2.2 million to $7.4 million.

In the 3^rd quarter of 2020, annualized net loan charge-offs on average consumer credit card loans were 4.47%, compared to 2.17% in the previous quarter, and 4.45% in the same quarter last year. Consumer loan net charge-offs were .04% of average consumer loans in the current quarter, .28% in the prior quarter and .43% in the same quarter last year.

This quarter, the provision for credit losses on loans totaled $3.2 million and was $4.4 million lower than net loan charge-offs. At September 30, 2020, the allowance for credit losses on loans totaled $236.4 million, or 1.44% of total loans and 1.59% of total loans excluding PPP loans. Additionally, the liability for unfunded lending commitments at September 30, 2020 was $35.2 million.

At September 30, 2020, total non-performing assets amounted to $40.3 million, an increase of $17.3 million over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($40.3 million and $57 thousand, respectively). At September 30, 2020, the balance of non-accrual loans, which represented .25% of loans outstanding, included business loans of $37.3 million, business real estate loans of $1.1 million, and personal real estate loans of $1.9 million. Loans more than 90 days past due and still accruing interest totaled $14.4 million at September 30, 2020.

Other

During the 3^rd quarter of 2020, the Company paid a cash dividend of $.27 per common share, representing an 8.9% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock. On September 1, 2020, the Company redeemed all outstanding shares of its Series B preferred stock.

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.