Commerce Bancshares, Inc. Reports Record Fourth Quarter Earnings of $94 Million

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced record earnings of $.86 per common share for the three months ended December 31, 2017 compared to $.65 per share in the same quarter last year and $.67 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the fourth quarter amounted to $94.4 million, compared to $71.6 million in the fourth quarter of 2016 and $74.6 million in the prior quarter. There were several extraordinary items which occurred in the 4^th quarter, including a previously announced $25 million contribution of appreciated stock to the Commerce Bancshares Foundation and a one-time bonus to certain employees of approximately $3.3 million. These two items combined with adjustments for the new corporate tax legislation added $.12 per share for this period. For the quarter, the return on average assets was 1.50%, the return on average common equity was 14.2%, and the efficiency ratio was 67.9%.

For the year ended December 31, 2017, earnings per common share totaled $2.89 compared to $2.49 in 2016, or an increase of 16.1%. Net income attributable to Commerce Bancshares, Inc. for the year ended December 31, 2017 increased 16.0% to $319.4 million compared to $275.4 million last year. For the current year, the return on average assets was 1.28%, and the return on average common equity was 12.5%.

In announcing these results, David W. Kemper, Chairman and CEO, said, “Core earnings were strong this quarter driven by growth in net interest income, higher fee income, solid expense control and continued low credit losses. Our net interest margin continued to expand, driven by increased rates on both our loan and investment portfolios, while deposit costs remained stable. We saw strong growth from both our trust and commercial card businesses, which increased 12.9% and 14.3%, respectively, over the same quarter in the prior year. Non-interest expense increased just 2.3% over the same quarter last year when adjusted for the one-time bonus and foundation contribution, as we continue to focus on expenses. This quarter total average loans increased $183.0 million, or 5.3% annualized over the prior quarter, driven by growth in construction, business, business real estate, consumer and consumer credit card lending activities.”

Mr. Kemper added, “Credit quality remains strong, and capital and liquidity levels continue to be among the best in the banking industry. For the current quarter, net loan charge-offs totaled $11.0 million, up slightly over the prior quarter. This small increase was due mainly to growth in net loan charge-offs in business loans, offset by lower automobile loan net charge-offs. The ratio of annualized net loan charge-offs to average loans was .32% this quarter compared to .31% last quarter. Non-performing assets decreased this quarter to $12.7 million, or a decline of $2.0 million from the prior quarter. During the current quarter, the provision for loan losses exceeded net loan charge-offs by $1.7 million, and the allowance for loan losses amounted to $159.5 million, or 1.14% of period end loans.”

Total assets at December 31, 2017 were $24.8 billion, total loans were $14.0 billion, and total deposits were $20.4 billion. During the fourth quarter of 2017, the Company distributed a 5% stock dividend on its common stock. This quarter the Company also paid an annualized 6% cash dividend on its preferred stock and a cash dividend of $.214 per common share, as restated for the 5% stock dividend.

Commerce Bancshares, Inc. is a regional bank holding company offering a full range of financial products to consumers and commercial customers including personal banking, lending, mortgage banking, wealth management, brokerage and capital markets services. The Company currently operates in approximately 330 locations in the central United States and has a nationwide presence in the commercial payments industry.

This financial news release, including management's discussion of fourth quarter results, is posted to the Company's web site at www.commercebank.com.

For additional information, contact
Jeffery Aberdeen, Controller
at 1000 Walnut Street, Suite 700
Kansas City, MO 64106
or by telephone at [phone]
Web Site: http://www.commercebank.com
Email: [e-mail]

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
FINANCIAL HIGHLIGHTS
			For the Three Months Ended												For the Year Ended
(Unaudited) (Dollars in thousands, except per share data)			December 31, 2017				September 30, 2017				December 31, 2016				December 31, 2017				December 31, 2016
FINANCIAL SUMMARY
Net interest income			$190,008				$182,591				$173,202				$733,679				$680,049
Non-interest income			124,212				122,242				119,479				486,604				474,392
Total revenue			314,220				304,833				292,681				1,220,283				1,154,441
Investment securities gains (losses), net			27,209				(3,037		)		3,651				25,051				(53		)
Provision for loan losses			12,654				10,704				10,400				45,244				36,318
Non-interest expense			213,688				184,572				181,261				769,684				717,065
Income before taxes			115,087				106,520				104,671				430,406				401,005
Income taxes			20,104				32,294				32,297				110,506				124,151
Non-controlling interest expense (income)			628				(338		)		795				517				1,463
Net income attributable to Commerce Bancshares, Inc.			94,355				74,564				71,579				319,383				275,391
Preferred stock dividends			2,250				2,250				2,250				9,000				9,000
Net income available to common shareholders			$92,105				$72,314				$69,329				$310,383				$266,391
Earnings per common share:
Net income — basic			$.86				$.68				$.65				$2.90				$2.50
Net income — diluted			$.86				$.67				$.65				$2.89				$2.49
Effective tax rate			17.56		%		30.22		%		31.09		%		25.71		%		31.07		%
Tax equivalent net interest income			$197,917				$190,497				$181,301				$766,601				$711,433
Average total interest earning assets (1)			$	23,851,260			$	23,790,684			$	23,775,165			$	23,957,929			$	23,378,121
Diluted wtd. average shares outstanding			105,976,402				105,981,083				105,586,262				105,927,203				105,523,631
RATIOS
Average loans to deposits (2)			68.15		%		66.96		%		64.24		%		66.18		%		63.71		%
Return on total average assets			1.50				1.19				1.14				1.28				1.12
Return on average common equity (3)			14.17				11.35				11.48				12.46				11.33
Non-interest income to total revenue			39.53				40.10				40.82				39.88				41.09
Efficiency ratio (4)			67.91				60.44				61.82				62.97				61.98
Net yield on interest earning assets			3.29				3.18				3.03				3.20				3.04
EQUITY SUMMARY
Cash dividends per common share			$.214				$.214				$.204				$.857				$.816
Cash dividends on common stock			$22,897				$22,906				$21,776				$91,619				$87,070
Cash dividends on preferred stock			$2,250				$2,250				$2,250				$9,000				$9,000
Book value per common share (5)			$24.14				$23.99				$22.12
Market value per common share (5)			$55.84				$55.02				$55.06
High market value per common share			$57.91				$56.42				$56.40
Low market value per common share			$52.07				$49.43				$43.21
Common shares outstanding (5)			106,615,043				106,706,732				106,534,010
Tangible common equity to tangible assets (6)			9.84		%		9.72		%		8.66		%
Tier I leverage ratio			10.39		%		10.16		%		9.55		%
OTHER QTD INFORMATION
Number of bank/ATM locations			327				334				336
Full-time equivalent employees			4,800				4,811				4,784

(1)		Excludes allowance for loan losses and unrealized gains/(losses) on available for sale 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).

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
			For the Three Months Ended															For the Year Ended
(Unaudited) (In thousands, except per share data)			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016
Interest income			$201,572			$194,244			$193,594			$187,997			$181,498			$777,407			$713,052
Interest expense			11,564			11,653			10,787			9,724			8,296			43,728			33,003
Net interest income			190,008			182,591			182,807			178,273			173,202			733,679			680,049
Provision for loan losses			12,654			10,704			10,758			11,128			10,400			45,244			36,318
Net interest income after provision for loan losses			177,354			171,887			172,049			167,145			162,802			688,435			643,731
NON-INTEREST INCOME
Bank card transaction fees			47,717			44,521			44,999			43,204			45,338			180,441			181,879
Trust fees			35,405			34,620			33,120			32,014			31,360			135,159			121,795
Deposit account charges and other fees			22,598			22,659			22,861			21,942			22,134			90,060			86,394
Capital market fees			1,743			1,755			2,156			2,342			2,679			7,996			10,655
Consumer brokerage services			3,576			3,679			3,726			3,649			3,409			14,630			13,784
Loan fees and sales			3,099			3,590			4,091			3,168			2,583			13,948			11,412
Other			10,074			11,418			12,131			10,747			11,976			44,370			48,473
Total non-interest income			124,212			122,242			123,084			117,066			119,479			486,604			474,392
INVESTMENT SECURITIES GAINS (LOSSES), NET			27,209			(3,037	)		1,651			(772	)		3,651			25,051			(53	)
NON-INTEREST EXPENSE
Salaries and employee benefits			115,741			111,382			108,829			112,369			108,639			448,321			427,310
Net occupancy			11,280			11,459			11,430			11,443			11,529			45,612			46,290
Equipment			4,692			4,491			4,776			4,609			4,884			18,568			19,141
Supplies and communication			6,118			5,517			5,446			5,709			5,645			22,790			24,135
Data processing and software			23,093			22,700			23,356			23,097			23,390			92,246			92,722
Marketing			3,937			4,676			4,488			3,224			3,431			16,325			16,032
Deposit insurance			3,444			3,479			3,592			3,471			3,443			13,986			13,327
Community service			25,511			3,006			2,916			2,944			822			34,377			3,906
Other			19,872			17,862			19,761			19,964			19,478			77,459			74,202
Total non-interest expense			213,688			184,572			184,594			186,830			181,261			769,684			717,065
Income before income taxes			115,087			106,520			112,190			96,609			104,671			430,406			401,005
Less income taxes			20,104			32,294			33,201			24,907			32,297			110,506			124,151
Net income			94,983			74,226			78,989			71,702			72,374			319,900			276,854
Less non-controlling interest expense (income)			628			(338	)		29			198			795			517			1,463
Net income attributable to Commerce Bancshares, Inc.			94,355			74,564			78,960			71,504			71,579			319,383			275,391
Less preferred stock dividends			2,250			2,250			2,250			2,250			2,250			9,000			9,000
Net income available to common shareholders			$92,105			$72,314			$76,710			$69,254			$69,329			$310,383			$266,391
Net income per common share — basic			$.86			$.68			$.71			$.65			$.65			$2.90			$2.50
Net income per common share — diluted			$.86			$.67			$.71			$.65			$.65			$2.89			$2.49
OTHER INFORMATION
Return on total average assets			1.50	%		1.19	%		1.26	%		1.15	%		1.14	%		1.28	%		1.12	%
Return on average common equity (1)			14.17			11.35			12.48			11.74			11.48			12.46			11.33
Efficiency ratio (2)			67.91			60.44			60.24			63.14			61.82			62.97			61.98
Effective tax rate			17.56			30.22			29.60			25.83			31.09			25.71			31.07
Net yield on interest earning assets			3.29			3.18			3.19			3.14			3.03			3.20			3.04
Tax equivalent net interest income			$197,917			$190,497			$190,865			$187,322			$181,301			$766,601			$711,433

(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)			December 31, 2017					September 30, 2017					December 31, 2016
ASSETS
Loans
Business			$	4,958,554				$	4,834,037				$	4,776,365
Real estate — construction and land			968,820					921,609					791,236
Real estate — business			2,697,452					2,700,174					2,643,374
Real estate — personal			2,062,787					2,029,302					2,010,397
Consumer			2,104,487					2,113,438					1,990,801
Revolving home equity			400,587					391,308					413,634
Consumer credit card			783,864					752,379					776,465
Overdrafts			7,123					3,245					10,464
Total loans			13,983,674					13,745,492					13,412,736
Allowance for loan losses			(159,532		)			(157,832		)			(155,932		)
Net loans			13,824,142					13,587,660					13,256,804
Loans held for sale			21,398					17,337					14,456
Investment securities:
Available for sale			8,774,280					9,109,287					9,649,203
Trading			18,269					24,605					22,225
Non-marketable			100,758					99,268					99,558
Total investment securities			8,893,307					9,233,160					9,770,986
Federal funds sold and short-term securities purchased under agreements to resell			42,775					32,630					15,470
Long-term securities purchased under agreements to resell			700,000					700,000					725,000
Interest earning deposits with banks			30,631					105,422					272,275
Cash and due from banks			438,439					461,724					494,690
Land, buildings and equipment — net			335,110					335,348					337,705
Goodwill			138,921					138,921					138,921
Other intangible assets — net			7,618					7,388					6,709
Other assets			401,074					359,551					608,408
Total assets			$	24,833,415				$	24,979,141				$	25,641,424
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing			$	7,158,962				$	7,536,127				$	7,429,398
Savings, interest checking and money market			11,499,620					11,091,200					11,430,789
Time open and C.D.’s of less than $100,000			634,646					657,891					713,075
Time open and C.D.’s of $100,000 and over			1,132,218					1,158,555					1,527,833
Total deposits			20,425,446					20,443,773					21,101,095
Federal funds purchased and securities sold under agreements to repurchase			1,507,138					1,408,984					1,723,905
Other borrowings			1,758					102,553					102,049
Other liabilities			180,889					319,354					213,243
Total liabilities			22,115,231					22,274,664					23,140,292
Stockholders’ equity:
Preferred stock			144,784					144,784					144,784
Common stock			535,407					510,015					510,015
Capital surplus			1,815,360					1,548,318					1,552,454
Retained earnings			221,374					440,261					292,849
Treasury stock			(14,473		)			(9,895		)			(15,294		)
Accumulated other comprehensive income			14,108					67,061					10,975
Total stockholders’ equity			2,716,560					2,700,544					2,495,783
Non-controlling interest			1,624					3,933					5,349
Total equity			2,718,184					2,704,477					2,501,132
Total liabilities and equity			$	24,833,415				$	24,979,141				$	25,641,424

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)			For the Three Months Ended
			December 31, 2017				September 30, 2017				June 30, 2017				March 31, 2017				December 31, 2016
ASSETS:
Loans:
Business			$	4,818,419			$	4,777,222			$	4,827,439			$	4,906,672			$	4,731,405
Real estate — construction and land			948,043				887,596				862,479				828,017				821,048
Real estate — business			2,720,356				2,710,453				2,701,144				2,645,531				2,559,028
Real estate — personal			2,044,651				2,017,264				2,003,997				2,012,456				1,985,606
Consumer			2,100,762				2,070,398				1,997,761				1,974,894				1,978,154
Revolving home equity			394,231				395,212				399,730				405,432				415,429
Consumer credit card			756,544				739,692				731,471				747,783				757,618
Overdrafts			5,295				4,373				4,505				4,185				5,501
Total loans			13,788,301				13,602,210				13,528,526				13,524,970				13,253,789
Allowance for loan losses			(157,026		)		(156,909		)		(157,003		)		(155,328		)		(154,040		)
Net loans			13,631,275				13,445,301				13,371,523				13,369,642				13,099,749
Loans held for sale			18,158				21,227				18,341				11,972				10,765
Investment securities:
U.S. government and federal agency obligations			917,664				917,808				910,821				913,474				811,524
Government-sponsored enterprise obligations			452,104				456,668				450,362				450,489				445,544
State and municipal obligations			1,630,660				1,699,365				1,771,674				1,783,103				1,784,407
Mortgage-backed securities			3,949,933				3,718,697				3,708,124				3,760,294				3,656,695
Asset-backed securities			1,622,778				2,025,415				2,335,344				2,359,644				2,417,367
Other marketable securities			356,319				327,634				326,398				332,643				333,236
Unrealized gain on investment securities			111,930				116,873				102,935				62,986				155,818
Total available for sale securities			9,041,388				9,262,460				9,605,658				9,662,633				9,604,591
Trading securities			20,401				21,149				21,062				25,165				21,717
Non-marketable securities			97,704				102,995				101,790				100,740				105,420
Total investment securities			9,159,493				9,386,604				9,728,510				9,788,538				9,731,728
Federal funds sold and short-term securities purchased under agreements to resell			27,017				23,807				13,115				9,887				8,336
Long-term securities purchased under agreements to resell			699,999				662,490				665,655				725,001				724,998
Interest earning deposits with banks			270,222				211,219				139,061				207,845				201,367
Other assets			1,157,289				1,122,230				1,106,528				1,139,402				1,153,982
Total assets			$	24,963,453			$	24,872,878			$	25,042,733			$	25,252,287			$	24,930,925
LIABILITIES AND EQUITY:
Non-interest bearing deposits			$	7,257,102			$	7,135,703			$	7,065,849			$	7,246,698			$	7,307,407
Savings			821,908				829,197				831,038				795,695				773,304
Interest checking and money market			10,416,221				10,387,212				10,667,042				10,603,988				10,512,268
Time open & C.D.’s of less than $100,000			644,951				667,710				688,047				705,135				722,775
Time open & C.D.’s of $100,000 and over			1,119,352				1,326,290				1,510,001				1,671,125				1,333,764
Total deposits			20,259,534				20,346,112				20,761,977				21,022,641				20,649,518
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase			1,625,828				1,500,987				1,363,031				1,356,316				1,284,916
Other borrowings			42,060				101,904				105,311				102,011				101,412
Total borrowings			1,667,888				1,602,891				1,468,342				1,458,327				1,386,328
Other liabilities			312,172				251,714				203,139				234,144				346,900
Total liabilities			22,239,594				22,200,717				22,433,458				22,715,112				22,382,746
Equity			2,723,859				2,672,161				2,609,275				2,537,175				2,548,179
Total liabilities and equity			$	24,963,453			$	24,872,878			$	25,042,733			$	25,252,287			$	24,930,925

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES
(Unaudited)			For the Three Months Ended
			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016
ASSETS:
Loans:
Business (1)			3.32	%		3.25	%		3.21	%		3.02	%		2.91	%
Real estate — construction and land			4.41			4.31			4.30			3.85			3.64
Real estate — business			3.90			3.85			3.74			3.63			3.61
Real estate — personal			3.72			3.72			3.72			3.74			3.69
Consumer			4.07			4.02			3.94			3.89			3.85
Revolving home equity			4.06			4.03			3.84			3.64			3.50
Consumer credit card			11.90			12.03			11.90			11.66			11.38
Overdrafts			—			—			—			—			—
Total loans			4.18			4.13			4.06			3.92			3.85
Loans held for sale			5.55			5.36			5.75			6.64			5.77
Investment securities:
U.S. government and federal agency obligations			2.60			1.40			2.52			2.09			2.18
Government-sponsored enterprise obligations			1.69			1.61			1.59			1.58			1.54
State and municipal obligations (1)			3.60			3.57			3.61			3.65			3.57
Mortgage-backed securities			2.38			2.36			2.35			2.38			2.40
Asset-backed securities			1.94			1.82			1.72			1.63			1.52
Other marketable securities (1)			2.86			2.73			2.76			2.82			2.95
Total available for sale securities			2.53			2.35			2.42			2.38			2.36
Trading securities (1)			2.63			2.51			2.70			2.77			2.40
Non-marketable securities (1)			8.08			6.46			11.49			21.08			5.42
Total investment securities			2.59			2.39			2.52			2.58			2.39
Federal funds sold and short-term securities purchased under agreements to resell			1.35			1.30			1.13			.94			.72
Long-term securities purchased under agreements to resell			2.36			2.28			2.22			2.12			1.86
Interest earning deposits with banks			1.18			1.24			1.04			.77			.56
Total interest earning assets			3.48			3.37			3.37			3.30			3.17
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings			.12			.12			.12			.13			.12
Interest checking and money market			.17			.16			.15			.14			.13
Time open & C.D.’s of less than $100,000			.40			.40			.39			.37			.37
Time open & C.D.’s of $100,000 and over			.88			.83			.75			.67			.60
Total interest bearing deposits			.24			.24			.23			.21			.19
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase			.83			.75			.60			.46			.30
Other borrowings			3.59			3.53			3.47			3.53			3.54
Total borrowings			.90			.93			.81			.67			.54
Total interest bearing liabilities			.31	%		.31	%		.29	%		.26	%		.22	%
Net yield on interest earning assets			3.29	%		3.18	%		3.19	%		3.14	%		3.03	%

(1)		Stated on a tax equivalent basis using a federal income tax rate of 35%.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY
			For the Three Months Ended																				For the Year Ended
(Unaudited) (In thousands, except per share data)			December 31, 2017				September 30, 2017				June 30, 2017				March 31, 2017				December 31, 2016				December 31, 2017				December 31, 2016
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period			$	157,832			$	157,832			$	157,832			$	155,932			$	154,532			$	155,932			$	151,532
Provision for losses			12,654				10,704				10,758				11,128				10,400				45,244				36,318
Net charge-offs (recoveries):
Commercial portfolio:
Business			768				195				318				97				268				1,378				616
Real estate — construction and land			(87		)		(362		)		(207		)		(535		)		(882		)		(1,191		)		(3,712		)
Real estate — business			(48		)		(106		)		(10		)		(39		)		97				(203		)		(1,281		)
			633				(273		)		101				(477		)		(517		)		(16		)		(4,377		)
Personal banking portfolio:
Consumer credit card			7,724				7,631				7,750				7,148				6,506				30,253				25,430
Consumer			2,184				3,057				2,642				2,096				2,427				9,979				9,047
Overdraft			376				445				292				435				379				1,548				1,339
Real estate — personal			(56		)		(137		)		(131		)		19				(38		)		(305		)		(6		)
Revolving home equity			93				(19		)		104				7				243				185				485
			10,321				10,977				10,657				9,705				9,517				41,660				36,295
Total net loan charge-offs			10,954				10,704				10,758				9,228				9,000				41,644				31,918
Balance at end of period			$	159,532			$	157,832			$	157,832			$	157,832			$	155,932			$	159,532			$	155,932
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business			.06		%		.02		%		.03		%		.01		%		.02		%		.03		%		.01		%
Real estate — construction and land			(.04		)		(.16		)		(.10		)		(.26		)		(.43		)		(.14		)		(.48		)
Real estate — business			(.01		)		(.02		)		—				(.01		)		.02				(.01		)		(.05		)
			.03				(.01		)		—				(.02		)		(.03		)		—				(.06		)
Personal banking portfolio:
Consumer credit card			4.05				4.09				4.25				3.88				3.42				4.07				3.39
Consumer			.41				.59				.53				.43				.49				.49				.46
Overdraft			28.17				40.37				26.00				42.15				27.41				33.71				28.42
Real estate — personal			(.01		)		(.03		)		(.03		)		—				(.01		)		(.02		)		—
Revolving home equity			.09				(.02		)		.10				.01				.23				.05				.12
			.77				.83				.83				.77				.74				.80				.72
Total			.32		%		.31		%		.32		%		.28		%		.27		%		.31		%		.25		%
CREDIT QUALITY RATIOS
Non-performing assets to total loans			.09		%		.11		%		.10		%		.11		%		.11		%
Non-performing assets to total assets			.05				.06				.06				.06				.06
Allowance for loan losses to total loans			1.14				1.15				1.16				1.16				1.16
NON-PERFORMING ASSETS
Non-accrual loans:
Business			$	5,947			$	6,821			$	6,330			$	7,935			$	8,682
Real estate — construction and land			5				533				544				585				564
Real estate — business			2,736				2,346				1,833				1,764				1,634
Real estate — personal			2,461				2,863				3,504				3,368				3,403
Consumer			834				1,077				1,151				1,151				—
Total			11,983				13,640				13,362				14,803				14,283
Foreclosed real estate			681				1,063				515				387				366
Total non-performing assets			$	12,664			$	14,703			$	13,877			$	15,190			$	14,649
Loans past due 90 days and still accruing interest			$	18,127			$	16,464			$	14,630			$	14,908			$	16,396
*as a percentage of average loans (excluding loans held for sale)

COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2017

For the quarter ended December 31, 2017, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $94.4 million, compared to $74.6 million in the previous quarter and $71.6 million in the same quarter last year. In the current quarter, the Company recorded contribution expense of $25.0 million for the donation of appreciated securities to a related foundation. This donation was offset by a $24.4 million gain recorded on the donated securities and the recognition of $9.3 million in tax benefits on this transaction. This contribution represents a continuation of a strategy employed in previous quarters this year. The Company also announced that as of December 31, 2017, one-time discretionary bonuses totaling $3.3 million would be paid to approximately 75% of all employees. Also, as part of the enactment of the new tax legislation, tax benefits of $6.8 million were recorded, mostly as a result of revaluing deferred tax assets and liabilities to the new lower tax rates.

Quarterly average loans increased $183.0 million over the previous quarter, while average deposits decreased $86.6 million. Compared to the previous quarter, net interest income increased $7.4 million, while non-interest income grew $2.0 million. Non-interest expense, exclusive of the foundation contribution and one-time bonuses, increased 1.8% over the prior quarter. The provision for loan losses totaled $12.7 million, up $2.0 million over the previous quarter. For the current quarter, the return on total average assets was 1.50%, the return on average common equity was 14.2%, and the efficiency ratio was 67.9%.

Balance Sheet Review

During the 4^th quarter of 2017, average loans totaled $13.8 billion, up 5.3% (annualized) over the prior quarter, and grew $541.9 million, or 4.1%, over the same period last year. Compared to the previous quarter, average construction and business loans grew $60.4 million and $41.2 million, respectively. Together, business real estate and personal real estate loans increased a combined $37.3 million, while consumer loans increased $30.4 million this quarter. Growth in construction loans was solid this quarter as advances on existing projects continued, while growth in business loans resulted from several large new borrowers. Line of credit utilization was mostly in line with the prior quarter at approximately 36% of total approved lines of credit. The increase in consumer loans was mainly due to growth of $19.1 million in patient health care loans, coupled with growth in private banking loans. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $48.0 million, compared to $64.1 million in the prior quarter.

During the 4^th quarter of 2017, total average available for sale investment securities decreased $221.1 million to $9.0 billion, at fair value. The decline in investment securities was mainly the result of lower average balances of asset-backed and municipal securities due to sales, paydowns and maturities of these securities that were not re-invested, offset by higher average balances of mortgage-backed securities. Purchases of securities this quarter totaled $669.8 million and were offset by sales, maturities and pay downs of $913.4 million. At December 31, 2017, the duration of the investment portfolio was 3.0 years, and maturities and pay downs of approximately $1.4 billion are expected to occur during the next 12 months.

Total average deposits decreased $86.6 million, or 1.7% (annualized), this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in certificates of deposit (decrease of $229.7 million), money market (decrease of $35.7 million), and personal demand (decrease of $52.0 million). These declines were offset by growth in business demand (increase of $210.1 million), and interest checking (increase of $64.8 million) deposit accounts. Compared to the previous quarter, total average consumer and private banking deposits decreased $15.7 million and $69.6 million, respectively, while commercial deposits grew slightly. The average loans to deposits ratio was 68.2% in the current quarter and 67.0% in the prior quarter. The Company’s average borrowings totaled $1.7 billion, an increase of $65.0 million over the prior quarter’s balance, mostly due to higher customer repurchase agreement balances.

Net Interest Income

Net interest income (tax equivalent) in the 4^th quarter of 2017 amounted to $197.9 million compared with $190.5 million in the previous quarter, an increase of $7.4 million. Net interest income (tax equivalent) for the current quarter increased $16.6 million, or 9.2%, compared to the 4^th quarter of last year. During the current quarter, the net yield on earning assets (tax equivalent) was 3.29%, compared with 3.18% in the previous quarter and 3.03% in the same period last year. The increase in net interest income (tax equivalent) in the current quarter compared to the prior quarter was due mainly to growth in interest on loans, a slight decline in interest expense, and an increase in inflation income of $2.7 million on the Company’s treasury inflation-protected securities (TIPS). Excluding the effects of inflation income on both the current and prior quarters, the net interest margin would have increased 7 basis points.

Compared to the previous quarter, interest on loans (tax equivalent) increased $3.6 million, as a result of higher loan yields and average balances on most loan products. The average yield on the loan portfolio increased 5 basis points this quarter to 4.18%, compared to 4.13% in the previous quarter.

Interest on investment securities (tax equivalent) increased $3.2 million over the previous quarter, due to growth in inflation income mentioned above, but offset by lower average securities balances, especially in asset-backed and municipal securities. The adjustment for premium amortization expense on changing prepayment speeds for mortgage-backed securities increased interest income $655 thousand this quarter, due to a higher overall interest rate environment. Total inflation income on TIPS totaled $3.2 million in the current quarter and $447 thousand in the previous quarter. The yield on total investment securities was 2.59% in the current quarter compared to 2.39% in the prior quarter.

Interest costs on deposits remained low and totaled 24 basis points in the 4^th quarter of 2017, unchanged from the prior quarter. Interest expense on deposits declined $124 thousand this quarter compared with the previous quarter due mainly to lower average balances of certificates of deposit. Borrowing costs increased $35 thousand this quarter mostly due to higher average rates paid on customer repurchase agreements. The overall rate paid on interest-bearing liabilities was .31%, the same as in the prior quarter.

Non-Interest Income

In the 4^th quarter of 2017, total non-interest income amounted to $124.2 million, an increase of $4.7 million, or 4.0%, compared to the same period last year. Also, current quarter non-interest income increased $2.0 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, bank card, deposit, and loan fee income, but was offset by lower swap and capital market fee income.

Total bank card fees in the current quarter increased $2.4 million, or 5.2%, over the same period last year and increased $3.2 million compared to the prior quarter. The increase over the same period last year was mainly the result of growth in corporate card fees of $3.1 million and higher debit and credit card fee income, but was offset by a decline in merchant fees of $1.0 million. As reported in prior quarters, the decline in merchant fees resulted from the loss of several large customers over the last twelve months. Total bank card fees this quarter were comprised of fees on corporate card ($24.9 million), debit card ($10.2 million), merchant ($5.9 million) and credit card ($6.7 million) transactions.

In the current quarter, trust fees increased $4.0 million, or 12.9%, over the same period last year, resulting mainly from growth in both private client and institutional trust fee income. Compared to the same period last year, deposit account fees increased $464 thousand, or 2.1%, due to growth in both deposit and overdraft fees, partially offset by lower corporate cash management fees.

During the 4^th quarter of 2017, cash sweep fees grew 20.3% to $2.0 million compared to the same period last year, and loan fees and sales grew $516 thousand, or 20.0%, on increased sales of residential mortgages. Swap fee income, however, declined $2.0 million on lower origination volume and capital market fees declined $936 thousand on lower sales volumes, mainly to correspondent bank customers. Non-interest income comprised 39.5% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities gains of $27.2 million this quarter, compared with net losses of $3.0 million last quarter and net gains of $3.7 million in the same period last year. Net securities gains in the current quarter resulted mainly from unrealized fair value gains of $2.2 million in the Company’s private equity investment portfolio, and a gain of $24.4 million related to the Company’s contribution of appreciated securities mentioned above. The Company also sold certain equity securities for a gain of $10.1 million this quarter, offset by sales of other investment securities at a loss of $9.7 million.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $213.7 million compared to $181.3 million in the same period last year. Excluding the effects of the contribution of appreciated securities to a related foundation and the one-time discretionary bonus, non-interest expense grew 2.3%, and was up slightly over the prior quarter. The increase over the same period last year was mainly due to higher costs for salaries and benefits and the contribution of appreciated securities (expense of $25.0 million this quarter), but was offset by lower operating costs such as occupancy, data processing, and other bank card network costs.

Compared to the 4^th quarter of last year, salaries and benefits expense increased $7.1 million, or 6.5%. Salaries expense grew $6.3 million, mainly due to higher incentive compensation costs, including the discretionary bonus of $3.3 million mentioned above. Benefits expense totaled $16.0 million, reflecting an increase of 5.3% mainly due to higher medical costs. Growth in full-time salaries expense compared to the previous year resulted mainly from increased staffing costs in commercial and consumer, information technology and other supporting business units. Full-time equivalent employees totaled 4,800 and 4,784 at December 31, 2017 and 2016, respectively.

The decline in occupancy costs of 2.2% was mainly due to demolition costs for a branch facility in the 4^th quarter of 2016, which did not recur in the current quarter. Data processing costs declined $297 thousand this quarter mainly due to lower bank card processing costs of $1.3 million offset by higher software costs. Other bank card network related costs (included in other non-interest expense) declined $1.0 million, but were offset by an increase in rewards expense of $416 thousand. The decline in total bank card related expense was mainly the result of a new vendor contract negotiated in the 3^rd quarter of 2017. Compared to the same period last year, supplies and communication and marketing costs increased $473 thousand and $506 thousand, respectively. The $25.0 million donation of appreciated securities to a related foundation this quarter increased community service costs by $24.7 million, but resulted in a pre-tax loss of $638 thousand (due to a related offsetting securities gain) and tax benefits of $9.3 million. The Company has completed this donation strategy, contributing over $32 million in 2017, which will not be repeated in future years.

Income Taxes

The effective tax rate for the Company was 17.6% in the current quarter, 30.2% in the previous quarter, and 31.09% in the 4^th quarter of 2016. Included in the current quarter were income tax benefits of $9.3 million related to the $25.0 million contribution of appreciated securities. In addition, an income tax benefit of $6.8 million was recorded, mainly to reflect the reduction in income tax rates on the Company’s deferred tax assets and liabilities as a result of the enactment of the new federal tax reform legislation in December 2017. The Company’s effective tax rate in 2018 is likely to be reduced to a range of 19-21% as a result of this new tax legislation.

Credit Quality

Net loan charge-offs in the 4^th quarter of 2017 amounted to $11.0 million, compared to $10.7 million in the prior quarter and $9.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .32% in the current quarter, compared to .31% in the previous quarter and .27% in the 4^th quarter of last year. During the 4^th quarter of 2017, the Company recorded net loan charge-offs on commercial loans of $633 thousand, compared to net loan recoveries of $273 thousand in the prior quarter. Net loan charge-offs on personal banking loans totaled $10.3 million in the current quarter and $11.0 million in the previous quarter.

In the 4^th quarter of 2017, annualized net loan charge-offs on average consumer credit card loans were 4.05%, compared to 4.09% in the previous quarter and 3.42% in the same period last year. Consumer loan net charge-offs were .41% of average consumer loans in the current quarter, .59% in the prior quarter and .49% in the same quarter last year. This quarter, the provision for loan losses exceeded net loan charge-offs by $1.7 million, and at December 31, 2017, the allowance totaled $159.5 million, or 1.14% of total loans.

At December 31, 2017, total non-performing assets amounted to $12.7 million, a decrease of $2.0 million from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($12.0 million and $681 thousand, respectively). At December 31, 2017, the balance of non-accrual loans, which represented .09% of loans outstanding, included business loans of $5.9 million, business real estate loans of $2.7 million, personal real estate loans of $2.5 million and consumer loans of $834 thousand. Loans more than 90 days past due and still accruing interest totaled $18.1 million at December 31, 2017.

Other

During the 4^th quarter of 2017, the Company distributed a 5% stock dividend on its common stock. The Company paid a cash dividend of $.214 per common share and also paid an annualized 6% cash dividend on its preferred stock. The Company purchased 114,822 shares of treasury stock during the current quarter at an average price of $56.18.

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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