Commerce Bancshares, Inc. Reports Third Quarter Earnings Per Share of $1.05

Commerce Bancshares, Inc. announced earnings of $1.05 per share for the three months ended September 30, 2021, compared to $1.06 per common share in the same quarter last year and $1.38 per share in the second quarter of 2021. Net income attributable to Commerce Bancshares, Inc. (net income) for the third quarter of 2021 amounted to $122.6 million, compared to $132.4 million in the third quarter of 2020 and $162.3 million in the prior quarter. For the quarter, the return on average assets was 1.40%, the return on average equity was 13.74% and the efficiency ratio was 59.9%.

For the nine months ended September 30, 2021, earnings per common share totaled $3.54 compared to $1.80 for the first nine months of 2020. Net income attributable to Commerce Bancshares, Inc. amounted to $415.9 million for the nine months ended September 30, 2021, compared to $224.2 million in the comparable period last year. Year to date, the return on average assets was 1.65%, and the return on average equity was 16.14%.

In announcing these results, John Kemper, Chief Executive Officer, said, "We are pleased to report solid earnings again this quarter, reflecting continued robust contributions from our fee-based businesses. Trust fees grew 20.1% compared to the same quarter last year and 5.8% compared to the prior quarter. Bank card and deposit account fees continued to rebound strongly from last year's lows. Although loan demand has been somewhat limited, we did experience increases in construction and consumer loans this quarter and our Company remains well-positioned to benefit from a strengthening economy. Our portfolio of private equity investments also performed well, driving net investment securities gains of $13.1 million. Non-interest expense increased compared to the same quarter last year, as higher incentive compensation reflected our improved financial performance in 2021 and certain business expenses that declined precipitously during the pandemic are rebounding from lows set one year ago. Additionally, other expense was elevated during the quarter, reflecting non-recurring litigation settlement expenses. Compared to the previous quarter, average deposits grew $344.0 million, or 1.2%, while average loan balances declined $731.5 million, or 4.6% (average PPP loan balances declined $689.2 million). As of September 30, 2021, 84% percent of our PPP loan balances have been forgiven."

Mr. Kemper continued, "Credit quality of the loan portfolio remains excellent. This quarter, net loan charge-offs totaled $3.7 million, compared to $699 thousand in the prior quarter and $7.6 million in the third quarter of 2020. The ratio of annualized net loan charge-offs to average loans was .10% in the current quarter, .02% in the prior quarter and .18% in the third quarter of last year. Net charge-offs on consumer card loans declined $2.2 million from the prior quarter, and net charge-offs on consumer loans remained low. Non-performing assets totaled $10.5 million and also remained at very low levels. At September 30, 2021, the allowance for credit losses on loans decreased to $162.8 million. Excluding Paycheck Protection Plan (PPP) loans, the allowance for credit losses on loans to total loans was 1.10% at September 30, 2021."

Total assets at September 30, 2021 were $34.5 billion, total loans were $15.1 billion, and total deposits were $28.1 billion. During the quarter, the Company paid a cash dividend of $.263 per share, representing a 2.1% increase over the rate paid in the third quarter of 2020. The Company purchased 575,457 shares of its common stock this quarter.

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 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. and SUBSIDIARIES
FINANCIAL HIGHLIGHTS

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - PERIOD END

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY

COMMERCE BANCSHARES, INC.
Management Discussion of Third Quarter Results
September 30, 2021

For the quarter ended September 30, 2021, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $122.6 million, compared to $162.3 million in the previous quarter and $132.4 million in the same quarter last year. The decrease in net income compared to the previous quarter was primarily the result of an increase in the provision for credit losses, higher non-interest expense, and lower investment securities gains, partly offset by higher net interest income and lower income tax expense. Compared to the prior quarter, the provision for credit losses increased due to a smaller decrease in the estimate of the allowance for credit losses on loans and unfunded lending commitments and higher net loan charge-offs. The net yield on interest earning assets declined two basis points to 2.58%. Average loans declined $731.5 million compared to the previous quarter, while average available for sale debt securities grew $920.9 million, and average deposits increased $344.0 million. For the quarter, the return on average assets was 1.40%, the return on average common equity was 13.74%, and the efficiency ratio was 59.9%.

Balance Sheet Review

During the 3^rd quarter of 2021, average loans totaled $15.3 billion, a decrease of $731.5 million from the prior quarter, and declined $1.1 billion, or 6.8%, from the same quarter last year. Period end loans decreased $491.9 million compared to the prior quarter. Compared to the previous quarter, average balances of business, business real estate and personal real estate loans declined $774.1 million (includes a decline of $689.2 million in Paycheck Protection Program (PPP) loan balances), $32.1 million and $28.7 million, respectively. This decline was partially offset by growth in construction and consumer loans of $80.1 million and $36.6 million, respectively. The period end balance of PPP loans decreased $546.4 million during the 3^rd quarter of 2021 and totaled $307.9 million at September 30, 2021. As of September 30, 2021, 97% of round 1 and 35% of round 2 PPP loan balances have been forgiven. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $119.3 million, compared to $164.6 million in the prior quarter.

Total average available for sale debt securities increased $920.9 million over the previous quarter to $13.8 billion, at fair value. The increase in investment securities was mainly the result of growth in mortgage-backed and asset-backed securities. During the current quarter, purchases of securities totaled $1.8 billion with a weighted average yield of approximately 1.20%. Maturities and pay downs were $817.2 million, and there were no sales during the quarter. At September 30, 2021, the duration of the investment portfolio was 3.5 years, and maturities and pay downs of approximately $2.8 billion are expected to occur during the next 12 months.

Total average deposits increased $344.0 million this quarter compared to the previous quarter. The increase in deposits mostly resulted from growth in demand deposits of $365.9 million. Additionally, interest checking and money market deposits grew $59.7 million, while certificate of deposit balances declined $92.1 million. Compared to the previous quarter, total average commercial deposits grew $360.1 million. The average loans to deposits ratio was 54.4% in the current quarter and 57.8% in the prior quarter. The Company's average borrowings, which include customer repurchase agreements, were $2.4 billion in the 3^rd quarter of 2021 and $2.2 billion in the prior quarter.

Net Interest Income

Net interest income in the 3^rd quarter of 2021 amounted to $214.0 million, an increase of $6.1 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $5.8 million over the previous quarter to $216.9 million. The increase in net interest income was mainly due to higher income earned on investment securities, partly offset by lower interest earned on loans and securities purchased under agreements to resell. The net yield on earning assets (tax equivalent) decreased to 2.58%, compared to 2.60% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $1.7 million. This decrease was mostly a result of lower average business loan balances, partially offset by higher yields on business loans and higher average construction loan balances. The increase in the yield on business loans was driven primarily by an increase in the yield on PPP loans, which grew to 7.73% this quarter. Excluding PPP loans, the yield on business loans was 2.92% in the 3^rd quarter of 2021 compared to 3.00% in the prior quarter. The average tax-equivalent yield on the loan portfolio increased nine basis points to 3.74% this quarter.

Interest income on investment securities (tax equivalent) increased $8.6 million over the previous quarter, due to both higher rates earned and average balances. Interest income earned on U.S. government and federal agency securities increased modestly, as inflation income from Treasury inflation-protected securities inflation income increased $591 thousand this quarter to $7.4 million. At September 30, 2021, the Company recorded a $5.0 million adjustment to premium amortization, which increased interest income this quarter to reflect moderately slower forward prepayment speed estimates on mortgage-backed securities. The yield on total investment securities was 1.89% in the current quarter, compared to 1.78% in the previous quarter.

The average rate paid on interest bearing deposits totaled .06% in the 3^rd quarter of 2021, compared .07% in the prior quarter. Interest expense on deposits decreased $359 thousand this quarter compared to the previous quarter mainly due to lower rates paid on certificate of deposit accounts. The overall rate paid on interest bearing liabilities was .06% in the current quarter, compared to .07% in the prior quarter.

Non-Interest Income

In the 3^rd quarter of 2021, total non-interest income amounted to $137.5 million, an increase of $7.9 million, or 6.1%, compared to the same period last year and decreased $1.6 million compared to the prior quarter. The increase in non-interest income over the same period last year was mainly due to growth in trust fees, bank card fees, and deposit account fees, partially offset by lower loan fees and sales.

Total net bank card fees in the current quarter increased $4.9 million, or 13.0%, over the same period last year, and increased $207 thousand compared to the prior quarter. Net corporate card fees increased $3.1 million, or 15.3%, over the same quarter of last year mainly due to higher interchange fee income, partly offset by higher rewards expense. Net debit card fees increased $681 thousand, or 7.0%, mainly due to higher interchange fees. Net merchant income increased $651 thousand, or 14.3%, and net credit card fees increased $504 thousand, or 15.0%. Total net bank card fees this quarter were comprised of fees on corporate card ($23.3 million), debit card ($10.4 million), merchant ($5.2 million) and credit card ($3.9 million) transactions.

In the current quarter, trust fees increased $8.2 million, or 20.1%, over the same period last year, resulting mostly from higher private client fee income. Compared to the same period last year, deposit account fees increased $2.1 million, or 8.9%, mainly due to higher overdraft and return item fees and corporate cash management fees. Loan fees and sales, mostly mortgage banking revenue, declined $2.9 million, or 30.0%, over amounts recorded in the same quarter last year. Consumer brokerage fees increased $889 thousand, or 22.2%, compared to the same quarter last year, mainly due to growth in annuity and advisory fees.

Other non-interest income decreased from the same period last year mainly due to lower cash sweep commissions and tax credit sales fees of $1.6 million and $1.1 million, respectively. Additionally, a $2.0 million loss was recorded this quarter on an equity method investment. For the 3^rd quarter of 2021, non-interest income comprised 39.1% of the Company's total revenue.

Investment Securities Gains and Losses

The Company recorded investment net gains of $13.1 million in the current quarter, compared to net gains of $16.8 million in the prior quarter and net gains of $16.2 million in the 3^rd quarter of 2020. Net gains on investments in the current quarter primarily resulted from unrealized fair value gains of $13.0 million in the Company's private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $211.6 million, compared to $190.9 million in the same period last year and $198.1 million in the prior quarter. The increase in non-interest expense compared to the same period last year and the prior quarter was mainly due to litigation settlement expense, higher salaries and benefits expense and data processing and software expense.

Compared to the 3^rd quarter of last year, salaries and employee benefits expense increased $5.5 million, mostly due to higher incentive compensation. Full-time equivalent employees totaled 4,582 and 4,825 at September 30, 2021 and 2020, respectively.

Data processing and software expense increased $2.0 million due to higher bank card processing fees and increased costs for service providers. Other non-interest expense increased mainly due to $8.2 million in litigation settlement costs. Additionally, legal and professional fees and travel and entertainment expense increased $1.3 million and $1.1 million, respectively.

Income Taxes

The effective tax rate for the Company was 22.0% in the current quarter, 21.8% in the previous quarter, and 20.6% in the 3^rd quarter of 2020.

Credit Quality

Net loan charge-offs in the 3^rd quarter of 2021 amounted to $3.7 million, compared to $699 thousand in the prior quarter and $7.6 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .10% in the current quarter, .02% in the previous quarter, and .18% in the 3^rd quarter of last year. Net loan charge-offs on personal banking loans decreased $2.1 million to $3.6 million.

In the 3^rd quarter of 2021, annualized net loan charge-offs on average consumer credit card loans were 2.04%, compared to 3.59% in the previous quarter, and 4.47% in the same quarter last year. Consumer loan net charge-offs were .10% of average consumer loans in the current quarter, .08% in the prior quarter and .04% in the same quarter last year.

During the 3^rd quarter of 2021, the economy continued to recover from the pandemic and the economic forecast utilized in the allowance for credit loss model continued to improve. This improvement, coupled with other model inputs, resulted in a decrease in the allowance for credit losses as of September 30, 2021. At September 30, 2021, the allowance for credit losses on loans totaled $162.8 million, or 1.07% of total loans and 1.10% of total loans excluding PPP loans. Additionally, the liability for unfunded lending commitments at September 30, 2021 was $22.8 million, a decrease of $1.4 million from the liability at June 30, 2021.

At September 30, 2021, total non-performing assets amounted to $10.5 million, a decrease of $859 thousand from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($10.4 million and $115 thousand, respectively). At September 30, 2021, the balance of non-accrual loans, which represented .07% of loans outstanding, included business loans of $8.3 million, personal real estate loans of $1.6 million, and business real estate loans of $577 thousand. Loans more than 90 days past due and still accruing interest totaled $10.5 million at September 30, 2021.

Other

During the 3^rd quarter of 2021, the Company paid a cash dividend of $.263 per common share, representing a 2.1% increase over the same period last year. The Company purchased 575,457 shares of treasury stock during the current quarter at an average price of $69.80.

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.