Commerce Bancshares, Inc. Reports Fourth Quarter Earnings Per Share of $.93

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.93 per common share for the three months ended December 31, 2019, compared to $.91 per share in the same quarter last year and $.93 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the fourth quarter of 2019 amounted to $106.9 million, compared to $109.7 million in the fourth quarter of 2018 and $109.2 million in the prior quarter. For the quarter, the return on average assets was 1.65%, the return on average common equity was 13.9% and the efficiency ratio was 56.3%.

For the year ended December 31, 2019, earnings per common share totaled $3.58 compared to $3.60 in 2018. Net income attributable to Commerce Bancshares, Inc. amounted to $421.2 million in 2019 compared to $433.5 million last year. For the current year, the return on average assets was 1.67%, and the return on average common equity was 14.1%.

In announcing these results, John Kemper, Chief Executive Officer, said, "Commerce had a strong quarter, benefiting from continuing strength in the economy and in financial markets. We experienced 4% annualized average loan growth this quarter resulting from demand for business loans, primarily commercial and industrial loans, and residential mortgage loans. Fee income totaled $143.5 million this quarter, and included a one-time gain on the sale of our corporate trust business. The corporate trust divestiture will allow Commerce Trust Company to focus on the higher growth core businesses of wealth, investment management, and financial planning services for individual and institutional clients. Excluding the corporate trust business, trust fees grew 8.7% in the fourth quarter of 2019 compared to the same quarter last year. Net interest income contracted slightly in the fourth quarter of 2019 compared to the prior quarter, as yields on our loans followed the decline in interest rates, while loan growth and improved funding costs helped to offset the decline in loan rates."

Mr. Kemper continued, "This quarter net loan charge-offs totaled $15.2 million, compared to $11.5 million in the prior quarter and $12.1 million in the fourth quarter of 2018, as the overall credit environment remained favorable. The ratio of annualized net loan charge-offs to average loans was .42% in the current quarter, compared to .32% in the previous quarter, and .34% in the fourth quarter of last year. Net loan charge-offs on commercial loans totaled $3.1 million this quarter, mostly the result of a single commercial leasing customer, while net loan charge-offs on personal banking loans increased slightly to $12.1 million. During the current quarter, the provision for loan losses equaled net loan charge-offs, and the allowance for loan losses amounted to $160.7 million at December 31, 2019, or 1.09% of period end loans. Non-performing assets totaled $10.6 million this quarter and remained at very low levels."

Total assets at December 31, 2019 were $26.1 billion, total loans were $14.8 billion, and total deposits were $20.5 billion. During the fourth quarter of 2019, the Company distributed a 5% stock dividend on its common stock. The Company also paid an annualized 6% cash dividend on its preferred stock and a cash dividend of $.248 per common share, as restated for the 5% stock dividend.

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 fourth quarter results, is posted to the Company's web site at www.commercebank.com.

COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2019

For the quarter ended December 31, 2019, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $106.9 million, compared to $109.2 million in the previous quarter and $109.7 million in the same quarter last year. The decrease in net income from the previous quarter was primarily the result of net losses on investment securities coupled with higher loan loss provision and non-interest expense, partly offset by higher non-interest income. Non-interest income increased $10.7 million this quarter, and included a one-time gain of $11.5 million resulting from the sale of our corporate trust business. Net interest margin declined seven basis points to 3.36%, mainly due to lower rates on loans. Average loans increased $146.0 million over the previous quarter, while average deposits increased $409.1 million. For the quarter, the return on average assets was 1.65%, the return on average common equity was 13.9%, and the efficiency ratio was 56.3%.

Balance Sheet Review

During the 4^th quarter of 2019, average loans totaled $14.5 billion and grew $448.5 million, or 3.2%, over the same quarter last year. Period-end loans grew $269.0 million over the prior quarter and $590.6 million over December 31, 2018. Compared to the previous quarter, average personal real estate loans grew $108.4 million and business loans grew $98.7 million. Average consumer loans also grew this quarter (growth of $37.2 million). This growth was partly offset by declines in average business real estate, construction, and consumer credit card lending activities. Growth in business loans was mostly the result of increased commercial and industrial lending activities. Personal real estate loans grew on higher loan originations during the 4^th quarter of 2019 compared to the previous quarter. Growth in average consumer loans was driven by higher demand for auto, health services financing, and other consumer lending. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $61.5 million, compared to $71.5 million in the prior quarter.

Total average available for sale debt securities decreased $32.7 million from the previous quarter to $8.6 billion, at fair value. The decrease in investment securities was mainly the result of declines in average asset-backed securities and mortgage-backed securities, partially offset by growth in average state and municipal obligations. Purchases of securities during the quarter totaled $510.8 million, and sales, maturities and pay downs were $565.1 million. At December 31, 2019, the duration of the investment portfolio was 3.0 years, and maturities and pay downs of approximately $1.3 billion are expected to occur during the next 12 months.

Total average deposits increased $409.1 million this quarter compared to the previous quarter. The increase in average deposits mostly resulted from growth in business demand deposits ($263.1 million) and interest checking deposits ($113.4 million). These increases were partially offset by a decline in certificates of deposit ($62.7 million). Compared to the previous quarter, total average commercial, wealth (including private banking), and consumer deposits increased $232.9 million, $107.2 million, and $53.7 million, respectively. The average loans to deposits ratio was 71.7% in the current quarter and 72.5% in the prior quarter. The Company's average borrowings, which includes customer repurchase agreements, were $1.9 billion in the 4^th quarter of 2019 and $2.0 billion in the prior quarter.

Net Interest Income

Net interest income in the 4^th quarter of 2019 amounted to $202.7 million compared to $203.5 million in the previous quarter, a decrease of $853 thousand. On a tax equivalent basis, net interest income for the current quarter decreased $802 thousand from the previous quarter to $206.2 million. Inflation income on inflation protected securities (TIPs) declined $419 thousand this quarter. Excluding changes in TIPs, net interest income decreased $383 thousand, while the adjusted net yield on earning assets (tax equivalent) decreased to 3.33%, compared to 3.40% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $6.7 million, mostly as a result of lower loan balances and yields on business real estate, construction, and consumer credit card loans, combined with lower yields on business loans. These decreases were partly offset by higher volume on personal real estate and business loans. The average tax equivalent yield on the loan portfolio declined 24 basis points this quarter to 4.47%, compared to 4.71% in the previous quarter, as yields contracted, more than offsetting the volume growth experienced this quarter.

Interest income on investment securities (tax equivalent) increased $213 thousand over the previous quarter, mainly due to a $1.1 million adjustment for slowing prepayment speeds for mortgage-backed and asset backed securities, partly offset by lower inflation income on TIPs, as noted above. The yield on total investment securities was 2.78% in the current quarter, up from 2.76% in the previous quarter.

Interest costs on deposits totaled 52 basis points in the 4^th quarter of 2019, compared to 58 basis points in the prior quarter. Interest expense on deposits decreased $1.6 million this quarter compared to the previous quarter mainly due to lower rates and balances on certificates of deposit greater than $100,000 and lower rates on interest checking and money market deposit accounts. Borrowing costs decreased $2.7 million, or 51 basis points, to 1.25% this quarter due to lower rates paid on customer repurchase agreements and lower balances and rates on federal funds purchased. The overall rate paid on interest bearing liabilities was .61% in the current quarter, compared to .73% in the prior quarter.

Non-Interest Income

In the 4^th quarter of 2019, total non-interest income amounted to $143.5 million, an increase of $10.4 million, or 7.8%, compared to the same period last year and increased $10.7 million, or 8.1%, compared to the prior quarter. The increase in non-interest income over the same period last year was due to the sale of our corporate trust business, growth in trust fees, deposit account fees, and swap fees, partly offset by lower net bank card fees.

Total net bank card fees in the current quarter declined $3.4 million, or 7.6%, from the same period last year, and decreased $3.4 million, or 7.7%, compared to the prior quarter. Net corporate card fees decreased $4.0 million, or 15.3%, from the same quarter last year mainly due to lower interchange income and higher rewards expense. Net credit card fees decreased $278 thousand, or 7.3%, mostly on higher rewards expense, while net debit card fees increased $198 thousand, or 1.9%, due to lower network expense. Net merchant income increased $672 thousand, or 15.4%, mainly due to higher interchange income and lower network expense. Total net bank card fees this quarter were comprised of fees on corporate card ($22.1 million), debit card ($10.4 million), merchant ($5.0 million) and credit card ($3.6 million) transactions.

In the current quarter, trust fees increased $2.9 million, or 7.8%, over the same period last year, resulting from continued growth in private client fee income. Compared to the same period last year, deposit account fees increased $1.1 million, or 4.6%, due to growth in corporate cash management fees, partially offset by lower overdraft fees.

During the 4^th quarter of 2019, loan fees and sales increased $412 thousand, or 13.5%, over amounts recorded in the same quarter last year, mainly due to higher mortgage banking revenue. In addition, other non-interest income grew $8.7 million and included growth of $1.0 million in swap fees, $676 thousand in cash sweep fees, and the aforementioned $11.5 million gain on the sale of our corporate trust business. These increases were partially offset by lower tax credit sales of $1.2 million and a $7.7 million net gain on the disposition of branch properties recorded in the 4^th quarter of last year. Excluding the gain on the sale of the corporate trust business, non-interest income comprised 39.4% of the Company's total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $248 thousand in the current quarter, compared to gains of $4.9 million in the prior quarter and losses of $7.1 million in the 4^th quarter of 2018. Net securities losses in the current quarter resulted mainly from sales of investment securities, partly offset by proceeds received on an equity investment and unrealized fair value gains in the Company's private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $195.2 million, compared to $188.6 million in the same period last year and $191.0 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 and data processing and software expense, partially offset by lower marketing expense.

Compared to the 4^th quarter of last year, salaries and employee benefits expense increased $6.4 million, or 5.3%, driven mainly by growth in full-time salary costs and higher medical expense. Full-time equivalent employees totaled 4,858 and 4,795 at December 31, 2019 and 2018, respectively.

For the current quarter compared to the same quarter of last year, marketing costs decreased $1.7 million mainly due to increased marketing efforts in the prior year for consumer deposit customers. Data processing and software expense increased $1.7 million due to higher costs for service providers and bank card processing expense. Occupancy expense also increased $507 thousand.

Income Taxes

The effective tax rate for the Company was 20.9% in the current quarter, 21.0% in the previous quarter, and 19.5% in the 4^th quarter of 2018.

Credit Quality

Net loan charge-offs in the 4^th quarter of 2019 amounted to $15.2 million, compared to $11.5 million in the prior quarter and $12.1 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .42% in the current quarter, compared to .32% in the previous quarter and .34% in the 4^th quarter of last year. Compared to the prior quarter, net loan charge-offs on commercial loans increased $2.8 million to $3.1 million, while net loan charge-offs on personal banking loans increased $963 thousand to $12.1 million. The increase in commercial loan charge-offs this quarter was primarily the result of a single leasing customer.

In the 4^th quarter of 2019, annualized net loan charge-offs on average consumer credit card loans were 4.68%, compared to 4.45% in the previous quarter, and 3.73% in the same quarter last year. Consumer loan net charge-offs were .57% of average consumer loans in the current quarter, .43% in the prior quarter and .57% in the same quarter last year. This quarter, the provision for loan losses equaled the net loan charge-offs, and at December 31, 2019, the allowance totaled $160.7 million, or 1.09% of total loans.

At December 31, 2019, total non-performing assets amounted to $10.6 million, a decrease of $1.7 million from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($10.2 million and $365 thousand, respectively). At December 31, 2019, the balance of non-accrual loans, which represented .07% of loans outstanding, included business loans of $7.5 million, business real estate loans of $1.0 million, and personal real estate loans of $1.7 million. Loans more than 90 days past due and still accruing interest totaled $19.9 million at December 31, 2019.

Other

During the 4^th quarter of 2019, the Company distributed a 5% stock dividend on its common stock and paid a cash dividend of $.248 per common share (as restated for the stock dividend), representing a 16% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock. In August 2019, the Company entered into an accelerated stock repurchase (ASR) program totaling $150.0 million and received approximately 75% of the total shares expected to be delivered in the overall ASR program. On December 26, 2019, the ASR program was completed according to its contract terms and the Company received an additional 438,009 shares, based on the average price of its common stock during the repurchase period. Additionally, the Company purchased 229,313 shares of treasury stock during the current quarter at an average price of $65.12.

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.