Commerce Bancshares, Inc. announced earnings of $.86 per share for the three months ended March 31, 2024, compared to $.91 per share in the same quarter last year and $.84 per share in the fourth quarter of 2023. Net income for the first quarter of 2024 amounted to $112.7 million, compared to $119.5 million in the first quarter of 2023 and $109.2 million in the prior quarter.

“Commerce delivered a strong financial performance for the first quarter,” said John Kemper, President and Chief Executive Officer. “Our results are a reflection of fundamental strength and a diversified business model, and evidence of our ability to perform well through economic cycles.

“Although interest rates continue to be elevated and put downward pressure on bank balance sheets, Commerce's net interest income grew slightly over the previous quarter and our net interest margin expanded 16 basis points. Interest-bearing deposit costs increased just four basis points over the previous quarter, a product of our high-quality deposit franchise. Non-interest income comprised 37.4% of total revenue.

"Our liquidity and capital levels remain robust, and credit performance remains excellent, with non-accrual loans at .03% of total loans, down from .05% from the first quarter of last year."

First Quarter 2024 Financial Highlights:

• Net interest income was $249.0 million, a $578 thousand increase over the prior quarter. The net yield on interest earning assets increased 16 basis points to 3.33%.

• Non-interest income totaled $148.8 million, an increase of $11.2 million compared to the same quarter last year.

• Trust fees grew $5.8 million, or 12.7% compared to the same period last year, mostly due to higher private client fees.

• Non-interest expense totaled $245.7 million, an increase of $21.6 million compared to the same quarter last year and included a $10.0 million litigation settlement expense and a $4.0 million accrual adjustment to the FDIC's insurance special assessment.

• Average loan balances totaled $17.1 billion and were flat compared to the prior quarter.

• Total average available for sale debt securities decreased $116.6 million from the prior quarter to $9.5 billion, at fair value. During the first quarter of 2024, the unrealized loss on available for sale debt securities increased $27.2 million to $1.2 billion, at period end.

• Total average deposits decreased $759.5 million, or 3.0%, compared to the prior quarter, and included $225.4 million of lower average brokered deposits, which paid off last quarter. The average rate paid on interest bearing deposits in the current quarter was 1.97%.

• The ratio of annualized net loan charge-offs to average loans was .21% compared to .19% in the prior quarter.

• The allowance for credit losses on loans decreased $1.9 million during the first quarter to $160.5 million, and the ratio of the allowance for credit losses on loans to total loans was .93% at March 31, 2024, compared to .94% at December 31, 2023.

• Total assets at March 31, 2024 were $30.4 billion, a decrease of $1.3 billion, or 4.2%, compared to the prior quarter.

• For the quarter, the return on average assets was 1.48%, the return on average equity was 15.39%, and the efficiency ratio was 61.7%.

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.

For the quarter ended March 31, 2024, net income amounted to $112.7 million, compared to $109.2 million in the previous quarter and $119.5 million in the same quarter last year. The increase in net income compared to the previous quarter was primarily the result of lower non-interest expense and higher non-interest income, partly offset by net losses on investment securities. The net yield on interest earning assets increased 16 basis points over the previous quarter to 3.33%. Average loans increased $22.0 million over the previous quarter, while average deposits, borrowings and available for sale debt securities, at fair value, declined $759.5 million, $280.0 million, and $116.6 million, respectively. For the quarter, the return on average assets was 1.48%, the return on average equity was 15.39%, and the efficiency ratio was 61.7%.

Balance Sheet Review

During the 1^st quarter of 2024, average loans totaled $17.1 billion, an increase of $22.0 million over the prior quarter, and increased $676.2 million, or 4.1%, over the same quarter last year. Compared to the previous quarter, average balances of business real estate loans grew $83.1 million, while construction and consumer loans declined $51.1 million and $34.8 million, respectively. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $7.4 million, compared to $8.7 million in the prior quarter.

Total average available for sale debt securities decreased $116.6 million compared to the previous quarter to $9.5 billion, at fair value. The decrease in debt securities was mainly the result of lower average balances of asset-backed securities. During the 1^st quarter of 2024, the unrealized loss on available for sale securities increased $27.2 million to $1.2 billion, at period end. Also during the 1^st quarter of 2024, purchases of securities totaled $145.7 million with a weighted average yield of approximately 4.65%, and sales, maturities and pay downs were $655.0 million. At March 31, 2024, the duration of the available for sale investment portfolio was 4.2 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 $759.5 million this quarter compared to the previous quarter. The decrease in deposits mostly resulted from lower average demand deposits of $420.1 million and lower average certificates of deposit of $364.2 million, which included lower brokered deposits of $225.4 million. Compared to the previous quarter, total average commercial deposits declined $743.8 million, while consumer and wealth deposits increased $138.8 million and $71.8 million, respectively. The average loans to deposits ratio was 69.9% in the current quarter and 67.7% in the prior quarter. The Company’s average borrowings, which included average customer repurchase agreements of $2.5 billion, decreased $280.0 million to $2.8 billion in the 1^st quarter of 2024, mostly due to a decline of $179.3 million in average Federal Home Loan Bank (FHLB) borrowings.

Net Interest Income

Net interest income in the 1^st quarter of 2024 amounted to $249.0 million, an increase of $578 thousand compared to the previous quarter. On a fully taxable-equivalent (FTE) basis, net interest income for the current quarter increased $765 thousand over the previous quarter to $251.3 million. The increase in net interest income was mostly due to higher interest earned on loans and investment securities and lower interest expense on deposits and borrowings, partly offset by lower interest income earned on deposits with banks. The net yield (FTE) on earning assets increased to 3.33%, from 3.17% in the prior quarter.

Compared to the previous quarter, interest income on loans (FTE) increased $1.7 million, mostly due to higher average rates earned on business, consumer, and personal real estate loans. Interest income on loans also increased due to higher balances of business real estate loans, largely offset by lower balances of construction loans. The average yield (FTE) on the loan portfolio increased 12 basis points to 6.27% this quarter.

Interest income on investment securities (FTE) increased $1.3 million compared to the prior quarter, mostly due to higher rates earned on other debt securities, partly offset by lower average balances of available for sale debt securities. Interest on other debt securities included dividend payments of $3.4 million from the Company’s private equity investments. Interest income earned on U.S. government and federal agency securities decreased due to lower average balances and lower average rates, which included the impact of $1.7 million in lower inflation income from Treasury inflation-protected securities this quarter. Additionally, the Company recorded a $2.0 million adjustment to premium amortization at March 31, 2024, which increased interest income to reflect slower forward prepayment speed estimates on mortgage-backed securities and was higher than the $629 thousand adjustment that increased interest income in the prior quarter. The average yield (FTE) on total investment securities was 2.44% in the current quarter, compared to 2.27% in the previous quarter.

Compared to the previous quarter, interest income on deposits with banks decreased $6.5 million, mostly due to $449.0 million of lower average balances.

Interest expense decreased $4.5 million, mostly due to lower average balances of borrowings and deposits, partly offset by higher rates paid. The average rate paid on interest bearing deposits totaled 1.97% in the current quarter compared to 1.93% in the prior quarter. Interest expense on deposits decreased $1.2 million this quarter compared to the previous quarter. Interest expense on borrowings decreased $3.3 million, mostly due to a decline in average FHLB borrowings of $179.3 million and lower average balances of federal funds purchased. The overall rate paid on interest bearing liabilities was 2.21% in the current quarter compared to 2.20% in the prior quarter.

Non-Interest Income

In the 1st quarter of 2024, total non-interest income amounted to $148.8 million, an increase of $11.2 million compared to the same period last year and an increase of $4.0 million compared to the prior quarter. The increase in non-interest income compared to the same period last year was mainly due to higher trust fees, deposit account fees, and tax credit sales income. The increase in non-interest income compared to the prior quarter was mainly due to higher trust fees, brokerage fees, and tax credit sales income, partly offset by lower bank card fees.

Total net bank card fees in the current quarter increased $276 thousand, or .6%, compared to the same period last year, and decreased $948 thousand compared to the prior quarter. Net corporate card fees increased $164 thousand, or .6%, over the same quarter of last year mainly due to higher interchange fees, partly offset by higher rewards expense. Net debit card fees increased $118 thousand, or 1.1%, mostly due to lower network expense. Net merchant fees decreased $104 thousand, or 1.9%, while net credit card fees increased $98 thousand, or 2.7%. Total net bank card fees this quarter were comprised of fees on corporate card ($27.5 million), debit card ($10.4 million), merchant ($5.2 million) and credit card ($3.8 million) transactions.

In the current quarter, trust fees increased $5.8 million, or 12.7%, over the same period last year, mostly resulting from higher private client trust fees. Compared to the same period last year, deposit account fees increased $2.4 million, or 11.0%, mostly due to higher corporate cash management fees. Consumer brokerage fees decreased $677 thousand, or 13.3%.

Other non-interest income increased compared to the same period last year primarily due to higher tax credit sales income of $1.5 million and cash sweep fees of $731 thousand. For the 1^st quarter of 2024, non-interest income comprised 37.4% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities losses of $259 thousand in the current quarter, compared to gains of $7.6 million in the prior quarter and losses of $306 thousand in the 1^st quarter of 2023. Net securities losses in the current quarter primarily resulted from losses of $8.5 million realized on available for sale debt securities, partly offset by net fair value gains of $7.1 million in the Company’s portfolio of private equity investments.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $245.7 million, compared to $224.1 million in the same period last year and $251.3 million in the prior quarter. The increase in non-interest expense compared to the same period last year was mainly due to litigation settlement expense as well as higher salaries and employee benefits expense, FDIC insurance expense, and data processing and software expense, partly offset by lower marketing expense. The decrease in non-interest expense compared to the prior quarter was mainly due to lower FDIC insurance expense and marketing expense, partly offset by higher litigation settlement expense and employee benefits expense.

Compared to the 1^st quarter of last year, salaries and employee benefits expense increased $7.4 million, or 5.1%, mostly due to higher full-time salaries expense of $5.8 million and higher employee benefits expense of $1.3 million. Full-time equivalent employees totaled 4,721 and 4,636 at March 31, 2024 and 2023, respectively.

Compared to the same period last year, data processing and software expense increased $3.0 million due to higher bank card fees expense and increased costs for service providers. FDIC insurance expense increased $3.4 million, due to a $4.0 million accrual adjustment in the current quarter to the special assessment by the FDIC to replenish the Deposit Insurance Fund. These increases in expense were partly offset by lower marketing expense of $1.4 million. Other non-interest expense increased mainly due to $10.0 million in litigation settlement costs.

Income Taxes

The effective tax rate for the Company was 21.9% in the current quarter, 22.8% in the previous quarter, and 21.6% in the 1^st quarter of 2023.

Credit Quality

Net loan charge-offs in the 1^st quarter of 2024 amounted to $8.9 million, compared to $8.0 million in the prior quarter and $6.8 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .21% in the current quarter, .19% in the previous quarter, and .17% in the 1^st quarter of last year. Compared to the prior quarter, net loan charge-offs on personal banking loans increased $1.2 million to $9.0 million, mainly due to $1.1 million of higher consumer credit card loan net charge-offs.

In the 1^st quarter of 2024, annualized net loan charge-offs on average consumer credit card loans were 4.60%, compared to 3.72% in the previous quarter, and 3.15% in the same quarter last year. Consumer loan net charge-offs were .38% of average consumer loans in the current quarter, .36% in the prior quarter, and .25% in the same quarter last year.

At March 31, 2024, the allowance for credit losses on loans totaled $160.5 million, or .93% of total loans, and decreased $1.9 million compared to the prior quarter. Additionally, the liability for unfunded lending commitments at March 31, 2024 was $23.1 million, a decrease of $2.2 million compared to the liability at December 31, 2023.

At March 31, 2024, total non-accrual loans amounted to $5.8 million, a decrease of $1.5 million compared to the previous quarter. At March 31, 2024, the balance of non-accrual loans, which represented .03% of loans outstanding, included business loans of $1.0 million, revolving home equity loans of $2.0 million, personal real estate loans of $1.5 million, and business real estate loans of $1.2 million. Loans more than 90 days past due and still accruing interest totaled $20.3 million at March 31, 2024.

Other

During the 1^st 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 806,217 shares of treasury stock during the current quarter at an average price of $52.13.

The Company owns 823,447 shares of Visa Class B-1 common stock, carried at zero value on the Company’s balance sheet as of March 31, 2024. On April 8, 2024, Visa, Inc. (“Visa”) announced the commencement of a public offering to exchange Class B-1 common stock for a combination of shares of Class B-2 common stock and Class C common stock (“Exchange Offer”). The Company tendered all of its Visa Class B-1 shares and is awaiting notification of acceptance of that tender and the closing of the Exchange Offer. If the Company’s tendered shares are accepted and the exchange occurs in the second quarter of 2024, the Company expects to record a significant gain during the second quarter of 2024 based on the conversion privilege of the Class C common stock and the closing price of Visa Class A common stock. A full description of the terms of the Exchange Offer is set forth in Visa’s related Issuer Tender Offer Statement on Schedule TO and Prospectus, each dated April 8, 2024, publicly filed with the U. S. Securities and Exchange Commission.

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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