Commerce Bancshares, Inc. Reports Third Quarter Earnings Per Share of $.98

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.98 per common share for the three months ended September 30, 2019, compared to $.98 per share in the same quarter last year and $.96 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the third quarter of 2019 amounted to $109.2 million, compared to $112.6 million in the third quarter of 2018 and $108.0 million in the prior quarter. For the quarter, the return on average assets was 1.72%, the return on average common equity was 14.2% and the efficiency ratio was 56.7%.

For the nine months ended September 30, 2019, earnings per common share totaled $2.79 compared to $2.82 for the first nine months of 2018. Net income attributable to Commerce Bancshares, Inc. amounted to $314.4 million for the nine months ended September 30, 2019 compared to $323.9 million in the comparable period last year. Year to date, the return on average assets was 1.68%, and the return on average common equity was 14.1%.

In announcing these results, John Kemper, Chief Executive Officer, said, “We are pleased to announce another quarter of strong operating results, driven by growth in our diversified, fee-based businesses. Fee income totaled $132.7 million this quarter and represented 39% of our total revenue. Compared to the same period last year, fee income grew 7.3%, driven mainly by increases in bank card, trust, and loan fees and sales. Average loan growth was stronger this quarter compared to the previous quarter mainly due to demand for business loans, primarily commercial and industrial loans. Also, we continued to see strong demand for residential mortgage loans this quarter, which resulted in higher average loan balances and higher fee income. Net interest income contracted in the third quarter of 2019 mostly due to lower inflation income from our inflation-protected securities and less interest on floating rate commercial loans that are indexed to LIBOR. Adjusted for inflation income, the net yield on interest earning assets decreased ten basis points. While the recent drop in interest rates has started to impact net interest income, the strength of our fee-based businesses, disciplined approach to credit, and focus on expense management are mitigating some of the adverse effects of the declining interest rate environment.”

Mr. Kemper continued, “This quarter net loan charge-offs totaled $11.5 million, compared to $11.3 million in the prior quarter and $9.8 million in the third quarter of 2018, as the overall credit environment remained favorable. The ratio of annualized net loan charge-offs to average loans was .32% in both the current and previous quarters and .28% in the third quarter of last year. Net loan charge-offs on commercial loans totaled $291 thousand this quarter and remained exceptionally low, while net loan charge-offs on personal banking loans increased slightly to $11.2 million. During the current quarter, the provision for loan losses totaled $11.0 million, or $500 thousand lower than net loan charge-offs. The allowance for loan losses amounted to $160.7 million at September 30, 2019, or 1.11% of period end loans. Non-performing assets totaled $12.2 million this quarter and remained at very low levels.”

Total assets at September 30, 2019 were $25.9 billion, total loans were $14.5 billion, and total deposits were $20.3 billion. During the quarter, the Company paid a common cash dividend of $.26 per share, representing a 16.1% increase over the rate paid in 2018, and paid a 6% cash dividend on its preferred stock. The Company purchased 2,576,012 of its common shares 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, including management's discussion of third quarter results, is posted to the Company's web site at www.commercebank.com.

* * * * * * * * * * * * * * *
For additional information, contact
Matthew Burkemper, Investor Relations
at 8000 Forsyth, Mailstop: CBIR-1
Clayton, MO 63105
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 Nine Months Ended
(Unaudited) (Dollars in thousands, except per share data)		September 30, 2019				June 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
FINANCIAL SUMMARY
Net interest income		$203,512				$211,634				$207,754				$618,634				$611,605
Non-interest income		132,743				127,259				123,714				381,242				368,254
Total revenue		336,255				338,893				331,468				999,876				979,859
Investment securities gains (losses), net		4,909				(110		)		4,306				3,874				6,641
Provision for loan losses		10,963				11,806				9,999				35,232				30,438
Non-interest expense		191,020				189,779				185,059				572,224				549,196
Income before taxes		139,181				137,198				140,716				396,294				406,866
Income taxes		29,101				28,899				26,647				80,860				79,412
Non-controlling interest expense		838				328				1,493				1,083				3,564
Net income attributable to Commerce Bancshares, Inc.		109,242				107,971				112,576				314,351				323,890
Preferred stock dividends		2,250				2,250				2,250				6,750				6,750
Net income available to common shareholders		$106,992				$105,721				$110,326				$307,601				$317,140
Earnings per common share:
Net income — basic		$.98				$.96				$.99				$2.79				$2.83
Net income — diluted		$.98				$.96				$.98				$2.79				$2.82
Effective tax rate		21.04		%		21.11		%		19.14		%		20.46		%		19.69		%
Tax equivalent net interest income		$206,958				$215,203				$211,368				$629,265				$623,781
Average total interest earning assets (1)		$23,947,084				$23,939,495				$23,826,980				$23,920,745				$23,735,128
Diluted wtd. average shares outstanding		107,856,257				109,752,238				111,260,224				109,294,206				111,285,069
RATIOS
Average loans to deposits (2)		72.48		%		70.97		%		69.28		%		71.47		%		69.07		%
Return on total average assets		1.72				1.73				1.81				1.68				1.76
Return on average common equity (3)		14.21				14.46				16.43				14.11				16.27
Non-interest income to total revenue		39.48				37.55				37.32				38.13				37.58
Efficiency ratio (4)		56.66				55.88				55.73				57.08				55.95
Net yield on interest earning assets		3.43				3.61				3.52				3.52				3.51
EQUITY SUMMARY
Cash dividends per common share		$.260				$.260				$.224				$.780				$.671
Cash dividends on common stock		$27,993				$28,682				$25,059				$85,533				$75,261
Cash dividends on preferred stock		$2,250				$2,250				$2,250				$6,750				$6,750
Book value per common share (5)		$27.58				$27.53				$23.84
Market value per common share (5)		$60.65				$59.66				$62.88
High market value per common share		$61.84				$61.96				$69.10
Low market value per common share		$54.65				$56.63				$61.26
Common shares outstanding (5)		107,364,746				109,927,645				111,691,094
Tangible common equity to tangible assets (6)		10.95		%		11.25		%		10.10		%
Tier I leverage ratio		11.32		%		11.75		%		11.38		%
OTHER QTD INFORMATION
Number of bank/ATM locations		316				319				322
Full-time equivalent employees		4,873				4,857				4,797

(1)		Excludes allowance for loan losses and unrealized gains/(losses) on available for sale debt securities.
(2)		Includes loans held for sale.
(3)		Annualized net income available to common shareholders divided by average total equity less preferred stock.
(4)		The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(5)		As of period end.
(6)		The tangible common equity ratio is calculated as stockholders’ equity reduced by preferred stock, goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).
All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 2018.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
		For the Three Months Ended															For the Nine Months Ended
(Unaudited) (In thousands, except per share data)		September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			September 30, 2019			September 30, 2018
Interest income		$231,743			$238,412			$227,865			$232,832			$224,751			$698,020			$656,369
Interest expense		28,231			26,778			24,377			20,612			16,997			79,386			44,764
Net interest income		203,512			211,634			203,488			212,220			207,754			618,634			611,605
Provision for loan losses		10,963			11,806			12,463			12,256			9,999			35,232			30,438
Net interest income after provision for loan losses		192,549			199,828			191,025			199,964			197,755			583,402			581,167
NON-INTEREST INCOME
Bank card transaction fees		44,510			42,646			39,644			44,481			42,427			126,800			127,095
Trust fees		39,592			38,375			37,256			37,466			37,400			115,223			110,498
Deposit account charges and other fees		24,032			23,959			23,018			23,887			23,755			71,009			70,630
Capital market fees		1,787			1,944			1,879			1,843			1,595			5,610			5,878
Consumer brokerage services		4,030			3,888			3,747			4,184			3,884			11,665			11,623
Loan fees and sales		4,755			4,238			3,309			3,053			3,579			12,302			9,670
Other		14,037			12,209			12,387			18,173			11,074			38,633			32,860
Total non-interest income		132,743			127,259			121,240			133,087			123,714			381,242			368,254
INVESTMENT SECURITIES GAINS (LOSSES), NET		4,909			(110	)		(925	)		(7,129	)		4,306			3,874			6,641
NON-INTEREST EXPENSE
Salaries and employee benefits		123,836			120,062			122,128			120,517			116,194			366,026			347,677
Net occupancy		12,293			11,145			11,501			11,711			11,631			34,939			34,333
Equipment		4,941			4,790			4,471			4,508			4,592			14,202			13,617
Supplies and communication		5,106			5,275			5,162			5,095			5,103			15,543			15,542
Data processing and software		23,457			23,248			22,260			22,216			22,056			68,965			63,762
Marketing		6,048			6,015			5,900			5,602			4,999			17,963			14,946
Deposit insurance		1,621			1,693			1,710			1,796			3,167			5,024			9,750
Community service		564			641			803			480			580			2,008			1,965
Other		13,154			16,910			17,490			16,700			16,737			47,554			47,604
Total non-interest expense		191,020			189,779			191,425			188,625			185,059			572,224			549,196
Income before income taxes		139,181			137,198			119,915			137,297			140,716			396,294			406,866
Less income taxes		29,101			28,899			22,860			26,537			26,647			80,860			79,412
Net income		110,080			108,299			97,055			110,760			114,069			315,434			327,454
Less non-controlling interest expense (income)		838			328			(83	)		1,108			1,493			1,083			3,564
Net income attributable to Commerce Bancshares, Inc.		109,242			107,971			97,138			109,652			112,576			314,351			323,890
Less preferred stock dividends		2,250			2,250			2,250			2,250			2,250			6,750			6,750
Net income available to common shareholders		$106,992			$105,721			$94,888			$107,402			$110,326			$307,601			$317,140
Net income per common share — basic		$.98			$.96			$.85			$.96			$.99			$2.79			$2.83
Net income per common share — diluted		$.98			$.96			$.85			$.96			$.98			$2.79			$2.82
OTHER INFORMATION
Return on total average assets		1.72	%		1.73	%		1.58	%		1.75	%		1.81	%		1.68	%		1.76	%
Return on average common equity (1)		14.21			14.46			13.64			15.85			16.43			14.11			16.27
Efficiency ratio (2)		56.66			55.88			58.76			54.53			55.73			57.08			55.95
Effective tax rate		21.04			21.11			19.05			19.49			19.14			20.46			19.69
Net yield on interest earning assets		3.43			3.61			3.52			3.58			3.52			3.52			3.51
Tax equivalent net interest income		$206,958			$215,203			$207,104			$216,281			$211,368			$629,265			$623,781

(1)		Annualized net income available to common shareholders divided by average total equity less preferred stock.
(2)		The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - PERIOD END
(Unaudited) (In thousands)		September 30, 2019				June 30, 2019				September 30, 2018
ASSETS
Loans
Business		$	5,393,268			$	5,257,682			$	4,966,722
Real estate — construction and land		932,737				909,784				999,691
Real estate — business		2,833,146				2,867,831				2,726,042
Real estate — personal		2,226,663				2,160,515				2,120,672
Consumer		1,953,690				1,927,623				1,967,465
Revolving home equity		349,111				357,406				375,322
Consumer credit card		766,743				776,333				788,111
Overdrafts		7,236				3,074				11,534
Total loans		14,462,594				14,260,248				13,955,559
Allowance for loan losses		(160,682		)		(161,182		)		(159,732		)
Net loans		14,301,912				14,099,066				13,795,827
Loans held for sale		20,064				20,067				16,890
Investment securities:
Available for sale debt securities		8,660,419				8,682,303				8,674,986
Trading debt securities		35,918				36,508				19,676
Equity securities		4,186				4,744				4,467
Other securities		147,211				130,038				127,120
Total investment securities		8,847,734				8,853,593				8,826,249
Federal funds sold and short-term securities purchased under agreements to resell		2,850				—				14,375
Long-term securities purchased under agreements to resell		850,000				700,000				700,000
Interest earning deposits with banks		344,129				492,318				334,752
Cash and due from banks		512,254				456,192				443,004
Premises and equipment — net		365,949				363,554				331,869
Goodwill		138,921				138,921				138,921
Other intangible assets — net		9,139				8,763				8,470
Other assets		483,527				639,700				452,035
Total assets		$	25,876,479			$	25,772,174			$	25,062,392
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	6,816,527			$	6,274,838			$	6,728,605
Savings, interest checking and money market		11,424,404				11,452,849				11,733,057
Certificates of deposit of less than $100,000		627,630				613,505				585,765
Certificates of deposit of $100,000 and over		1,441,590				1,488,416				1,086,193
Total deposits		20,310,151				19,829,608				20,133,620
Federal funds purchased and securities sold under agreements to repurchase		1,641,274				2,394,294				1,862,117
Other borrowings		257,383				4,510				1,534
Other liabilities		561,657				372,399				257,311
Total liabilities		22,770,465				22,600,811				22,254,582
Stockholders’ equity:
Preferred stock		144,784				144,784				144,784
Common stock		559,432				559,432				535,407
Capital surplus		2,042,643				2,077,491				1,804,031
Retained earnings		463,231				384,232				493,641
Treasury stock		(251,663		)		(106,106		)		(33,174		)
Accumulated other comprehensive income (loss)		144,173				108,898				(141,596		)
Total stockholders’ equity		3,102,600				3,168,731				2,803,093
Non-controlling interest		3,414				2,632				4,717
Total equity		3,106,014				3,171,363				2,807,810
Total liabilities and equity		$	25,876,479			$	25,772,174			$	25,062,392

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)		For the Three Months Ended
		September 30, 2019				June 30, 2019				March 31, 2019				December 31, 2018				September 30, 2018
ASSETS:
Loans:
Business		$	5,263,312			$	5,142,794			$	5,084,920			$	5,028,635			$	4,926,063
Real estate — construction and land		920,206				908,777				907,062				953,166				992,045
Real estate — business		2,883,379				2,868,503				2,864,177				2,757,595				2,732,968
Real estate — personal		2,175,156				2,135,048				2,119,365				2,122,357				2,110,945
Consumer		1,924,434				1,907,979				1,929,202				1,962,401				1,984,643
Revolving home equity		354,040				361,673				370,962				374,216				373,819
Consumer credit card		763,377				766,080				781,167				788,353				774,512
Overdrafts		9,240				4,889				4,205				5,277				4,704
Total loans		14,293,144				14,095,743				14,061,060				13,992,000				13,899,699
Allowance for loan losses		(160,387		)		(161,403		)		(159,275		)		(158,880		)		(158,840		)
Net loans		14,132,757				13,934,340				13,901,785				13,833,120				13,740,859
Loans held for sale		19,882				20,731				18,350				18,475				18,201
Investment securities:
U.S. government and federal agency obligations		825,544				843,974				909,466				923,545				923,557
Government-sponsored enterprise obligations		181,929				199,506				199,480				214,913				261,938
State and municipal obligations		1,172,259				1,222,008				1,283,349				1,361,079				1,375,768
Mortgage-backed securities		4,712,508				4,614,703				4,360,428				4,379,805				4,434,119
Asset-backed securities		1,297,685				1,412,452				1,525,623				1,518,706				1,427,041
Other debt securities		334,218				331,459				335,612				339,841				339,952
Unrealized gain (loss) on debt securities		152,706				42,009				(48,925		)		(166,181		)		(119,319		)
Total available for sale debt securities		8,676,849				8,666,111				8,565,033				8,571,708				8,643,056
Trading debt securities		29,622				30,169				25,411				26,322				24,490
Equity securities		4,705				4,717				4,568				4,432				4,466
Other securities		134,896				130,433				130,057				127,634				120,206
Total investment securities		8,846,072				8,831,430				8,725,069				8,730,096				8,792,218
Federal funds sold and short-term securities purchased under agreements to resell		1,080				1,601				4,797				14,415				13,042
Long-term securities purchased under agreements to resell		713,030				700,000				700,000				699,999				685,869
Interest earning deposits with banks		226,582				331,999				316,660				352,942				298,632
Other assets		1,292,191				1,251,555				1,197,261				1,158,816				1,147,250
Total assets		$	25,231,594			$	25,071,656			$	24,863,922			$	24,807,863			$	24,696,071
LIABILITIES AND EQUITY:
Non-interest bearing deposits		$	6,290,036			$	6,335,620			$	6,324,738			$	6,666,715			$	6,677,665
Savings		924,581				929,974				896,378				870,844				877,347
Interest checking and money market		10,409,111				10,642,648				10,762,550				10,840,048				10,839,310
Certificates of deposit of less than $100,000		620,138				605,440				590,200				584,828				593,936
Certificates of deposit of $100,000 and over		1,503,805				1,378,402				1,267,517				1,090,546				1,100,299
Total deposits		19,747,671				19,892,084				19,841,383				20,052,981				20,088,557
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase		1,884,939				1,793,526				1,771,534				1,655,997				1,499,837
Other borrowings		77,248				1,318				1,248				1,335				1,833
Total borrowings		1,962,187				1,794,844				1,772,782				1,657,332				1,501,670
Other liabilities		390,560				307,433				284,018				264,449				296,884
Total liabilities		22,100,418				21,994,361				21,898,183				21,974,762				21,887,111
Equity		3,131,176				3,077,295				2,965,739				2,833,101				2,808,960
Total liabilities and equity		$	25,231,594			$	25,071,656			$	24,863,922			$	24,807,863			$	24,696,071

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES
(Unaudited)		For the Three Months Ended
		September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
ASSETS:
Loans:
Business (1)		3.85	%		4.02	%		4.07	%		3.93	%		3.80	%
Real estate — construction and land		5.46			5.63			5.73			5.47			5.21
Real estate — business		4.42			4.60			4.61			4.53			4.35
Real estate — personal		3.91			3.97			4.00			3.87			3.83
Consumer		4.88			4.77			4.73			4.62			4.46
Revolving home equity		5.17			5.20			5.17			4.98			4.72
Consumer credit card		12.42			12.33			12.18			11.91			11.99
Overdrafts		—			—			—			—			—
Total loans		4.71			4.82			4.85			4.72			4.59
Loans held for sale		6.15			6.98			7.38			6.59			6.87
Investment securities:
U.S. government and federal agency obligations		2.36			4.66			.78			1.90			2.23
Government-sponsored enterprise obligations		2.69			2.32			2.35			2.24			2.10
State and municipal obligations (1)		3.14			3.18			3.19			3.06			2.98
Mortgage-backed securities		2.61			2.70			2.76			2.75			2.65
Asset-backed securities		2.80			2.79			2.70			2.55			2.42
Other debt securities		2.63			2.68			2.69			2.60			2.59
Total available for sale debt securities		2.69			2.97			2.59			2.65			2.60
Trading debt securities (1)		2.91			3.14			3.24			3.21			3.13
Equity securities (1)		35.67			35.97			37.55			39.92			32.69
Other securities (1)		6.19			6.69			5.73			15.51			13.00
Total investment securities		2.76			3.04			2.66			2.86			2.76
Federal funds sold and short-term securities purchased under agreements to resell		2.57			2.76			2.79			2.56			2.10
Long-term securities purchased under agreements to resell		2.01			2.11			2.18			2.31			2.26
Interest earning deposits with banks		2.17			2.40			2.42			2.28			1.96
Total interest earning assets		3.90			4.05			3.93			3.92			3.80
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings		.11			.11			.11			.11			.11
Interest checking and money market		.38			.38			.35			.30			.26
Certificates of deposit of less than $100,000		1.11			1.01			.87			.70			.56
Certificates of deposit of $100,000 and over		1.99			2.02			1.92			1.61			1.41
Total interest bearing deposits		.58			.55			.51			.41			.35
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase		1.74			1.80			1.72			1.60			1.33
Other borrowings		2.33			1.52			1.62			2.67			2.60
Total borrowings		1.76			1.80			1.72			1.60			1.33
Total interest bearing liabilities		.73	%		.70	%		.65	%		.54	%		.45	%
Net yield on interest earning assets		3.43	%		3.61	%		3.52	%		3.58	%		3.52	%
(1) Stated on a tax equivalent basis using a federal income tax rate of 21%.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY
		For the Three Months Ended																				For the Nine Months Ended
(Unaudited) (In thousands, except per share data)		September 30, 2019				June 30, 2019				March 31, 2019				December 31, 2018				September 30, 2018				September 30, 2019				September 30, 2018
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period		$	161,182			$	160,682			$	159,932			$	159,732			$	159,532			$	159,932			$	159,532
Provision for losses		10,963				11,806				12,463				12,256				9,999				35,232				30,438
Net charge-offs (recoveries):
Commercial portfolio:
Business		335				284				447				1,748				332				1,066				354
Real estate — construction and land		—				(101		)		(16		)		(183		)		(119		)		(117		)		(452		)
Real estate — business		(44		)		(14		)		(37		)		(91		)		(42		)		(95		)		(287		)
		291				169				394				1,474				171				854				(385		)
Personal banking portfolio:
Consumer credit card		8,568				9,066				8,958				7,421				7,340				26,592				23,157
Consumer		2,069				1,723				1,924				2,805				2,091				5,716				6,481
Overdraft		446				253				317				500				351				1,016				1,121
Real estate — personal		(30		)		(21		)		101				(144		)		(153		)		50				(191		)
Revolving home equity		119				116				19				—				(1		)		254				55
		11,172				11,137				11,319				10,582				9,628				33,628				30,623
Total net loan charge-offs		11,463				11,306				11,713				12,056				9,799				34,482				30,238
Balance at end of period		$	160,682			$	161,182			$	160,682			$	159,932			$	159,732			$	160,682			$	159,732
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business		.03		%		.02		%		.04		%		.14		%		.03		%		.03		%		.01		%
Real estate — construction and land		—				(.04		)		(.01		)		(.08		)		(.05		)		(.02		)		(.06		)
Real estate — business		(.01		)		—				(.01		)		(.01		)		(.01		)		—				(.01		)
		.01				.01				.02				.07				.01				.01				(.01		)
Personal banking portfolio:
Consumer credit card		4.45				4.75				4.65				3.73				3.76				4.62				4.06
Consumer		.43				.36				.40				.57				.42				.40				.43
Overdraft		19.15				20.76				30.57				37.59				29.60				22.16				32.51
Real estate — personal		(.01		)		—				.02				(.03		)		(.03		)		—				(.01		)
Revolving home equity		.13				.13				.02				—				—				.09				.02
		.85				.86				.88				.80				.73				.86				.78
Total		.32		%		.32		%		.34		%		.34		%		.28		%		.33		%		.29		%
CREDIT QUALITY RATIOS
Non-performing assets to total loans		.08		%		.08		%		.09		%		.10		%		.07		%
Non-performing assets to total assets		.05				.05				.05				.05				.04
Allowance for loan losses to total loans		1.11				1.13				1.14				1.13				1.14
NON-PERFORMING ASSETS
Non-accrual loans:
Business		$	7,753			$	8,428			$	8,569			$	8,985			$	5,131
Real estate — construction and land		3				3				4				4				4
Real estate — business		2,359				950				1,746				1,715				1,467
Real estate — personal		1,618				1,752				1,848				1,832				1,767
Total		11,733				11,133				12,167				12,536				8,369
Foreclosed real estate		502				897				737				1,413				1,181
Total non-performing assets		$	12,235			$	12,030			$	12,904			$	13,949			$	9,550
Loans past due 90 days and still accruing interest		$	16,308			$	16,532			$	16,655			$	16,658			$	13,991
*as a percentage of average loans (excluding loans held for sale)

COMMERCE BANCSHARES, INC.
Management Discussion of Third Quarter Results
September 30, 2019

For the quarter ended September 30, 2019, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $109.2 million, compared to $108.0 million in the previous quarter and $112.6 million in the same quarter last year. The increase in net income over the previous quarter was primarily the result of higher non-interest income and gains on investment securities, partly offset by lower net interest income. Non-interest income increased $5.5 million and securities gains increased $5.0 million over the previous quarter. Excluding inflation income on inflation protected securities (TIPs), the net interest margin declined ten basis points to 3.40%, mainly due to lower rates on interest earning assets. Average loans increased $196.6 million over the previous quarter, while average deposits decreased $144.4 million. For the quarter, the return on average assets was 1.72%, the return on average common equity was 14.2%, and the efficiency ratio was 56.7%.

Balance Sheet Review

During the 3^rd quarter of 2019, average loans totaled $14.3 billion, or an increase of $196.6 million over the prior quarter, and grew $395.1 million, or 2.8%, over the same quarter last year. Period-end loans grew $202.3 million over the prior quarter and $510.2 million over September 30, 2018. Compared to the previous quarter, average business loans grew $120.5 million, and average personal real estate loans grew $40.1 million. Average consumer, business real estate, and construction loans also grew this quarter (growth of $16.5 million, $14.9 million, and $11.4 million, respectively). This growth was partly offset by declines in average revolving home equity and consumer credit card lending activities. Growth in business loans was the result of increased commercial and industrial lending activities. Personal real estate loans grew on higher loan originations during the 3^rd 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, but was partially offset by lower marine/RV, fixed home equity and other vehicle and equipment lending. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $71.5 million, compared to $60.4 million in the prior quarter.

Total average available for sale debt securities increased $10.7 million over the previous quarter to $8.7 billion, at fair value. The increase in investment securities was mainly the result of growth in average mortgage-backed securities, partially offset by declines in average asset-backed, state and municipal securities, U.S. government and federal agency obligations, and government-sponsored enterprise obligations. Additionally, the average balance of unrealized gains on available for sale debt securities increased $110.7 million during the current quarter. Purchases of securities during the quarter totaled $354.8 million, and sales, maturities and pay downs were $396.7 million. At September 30, 2019, the duration of the investment portfolio was 2.6 years, and maturities and pay downs of approximately $1.3 billion are expected to occur during the next 12 months.

Total average deposits decreased $144.4 million this quarter compared to the previous quarter. The decrease in average deposits resulted from declines in interest checking and money market deposits ($233.5 million) and trust demand deposits ($102.0 million). These decreases were partially offset by increases in certificates of deposit ($140.1 million) and other demand deposits ($56.4 million), respectively. Compared to the previous quarter, total average consumer and wealth deposits (including private banking) declined $106.3 million and $154.8 million, respectively, while average commercial deposits increased $96.0 million this quarter. The average loans to deposits ratio was 72.5% in the current quarter and 71.0% in the prior quarter. The Company’s average borrowings, which includes customer repurchase agreements, were $2.0 billion in the 3^rd quarter of 2019 and $1.8 billion in the prior quarter.

Net Interest Income

Net interest income in the 3^rd quarter of 2019 amounted to $203.5 million compared to $211.6 million in the previous quarter, a decrease of $8.1 million. On a tax equivalent basis, net interest income for the current quarter decreased $8.2 million from the previous quarter to $207.0 million. The decline in net interest income was mainly due to a $4.8 million decrease this quarter in inflation income on TIPs. Excluding changes in TIPs, net interest income decreased $3.5 million, while the adjusted net yield on earning assets (tax equivalent) decreased to 3.40%, compared to 3.50% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) increased $216 thousand, mostly as a result of higher loan balances and yields on consumer loans, combined with higher yields on consumer credit card loans. Growth in average commercial loan balances also contributed to increases in net interest income, but the increase was offset by lower yields on those loans. The average tax-equivalent yield on the loan portfolio declined 11 basis points this quarter to 4.71%, compared to 4.82% in the previous quarter, as yields on commercial loans contracted, more than offsetting yield growth on consumer and consumer credit card loans.

Interest income on investment securities (tax equivalent) decreased $6.1 million from the previous quarter, mainly due to the lower inflation income on TIPs, as noted above. The yield on total investment securities was 2.76% in the current quarter, down from 3.04% in the previous quarter.

Interest costs on deposits totaled 58 basis points in the 3^rd quarter of 2019, compared to 55 basis points in the prior quarter. Interest expense on deposits increased $789 thousand this quarter compared to the previous quarter mainly due to higher balances of certificates of deposit (CD), mainly in jumbo CD balances. Borrowing costs increased $664 thousand this quarter due to higher balances of federal funds purchased and higher balances and rates on Federal Home Loan Bank borrowings. The overall rate paid on interest bearing liabilities was .73% in the current quarter, compared to .70% in the prior quarter.

Non-Interest Income

In the 3^rd quarter of 2019, total non-interest income amounted to $132.7 million, an increase of $9.0 million, or 7.3%, compared to the same period last year and increased $5.5 million, or 4.3%, compared to the prior quarter. The increase in non-interest income over the same period last year was mainly due to growth in net bank card, trust, loan fees and sales, and swap fees, coupled with gains on sales of assets.

Total net bank card fees in the current quarter increased $2.1 million, or 4.9%, over the same period last year, and increased $1.9 million, or 4.4%, compared to the prior quarter. Net corporate card fees increased $1.1 million, or 4.6%, over the same quarter last year mainly due to lower rewards expense. Net debit card fees increased $573 thousand, or 5.8%, due to higher interchange income. Net merchant income declined $684 thousand, or 13.2%, mainly due to higher network expense, while net credit card fees increased $1.1 million, or 41.2% on lower rewards expense and higher interchange revenue. Total net bank card fees this quarter were comprised of fees on corporate card ($25.9 million), debit card ($10.5 million), merchant ($4.5 million) and credit card ($3.6 million) transactions.

In the current quarter, trust fees increased $2.2 million, or 5.9%, 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 $277 thousand, or 1.2%, due to growth in corporate cash management fees, partially offset by lower overdraft and deposit account fees.

During the 3^rd quarter of 2019, loan fees and sales increased $1.2 million, or 32.9%, over amounts recorded in the same quarter last year, mainly due to higher mortgage banking revenue. In addition, other non-interest income included growth of $871 thousand in swap fees and $954 thousand in gains on the sales of leased assets to customers upon lease termination. 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 $4.9 million in the current quarter, compared to losses of $110 thousand in the prior quarter and gains of $4.3 million in the 3^rd quarter of 2018. Net securities gains in the current quarter resulted mainly from 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 $191.0 million, compared to $185.1 million in the same period last year and $189.8 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, data processing and software and marketing expense, partly offset by lower deposit insurance expense and other non-interest expense.

Compared to the 3^rd quarter of last year, salaries and employee benefits expense increased $7.6 million, or 6.6%, driven mainly by growth in full-time salary costs and higher medical expense, partly offset by lower incentive compensation expense. Full-time equivalent employees totaled 4,873 and 4,797 at September 30, 2019 and 2018, respectively.

For the current quarter compared to the same quarter of last year, marketing costs increased $1.0 million mainly due to increased marketing efforts for consumer deposit customers and healthcare banking initiatives. Data processing and software expense increased $1.4 million due to higher costs for service providers and higher bank card processing expense. Occupancy expense also increased $662 thousand, while deposit insurance expense declined $1.5 million on reduced FDIC insurance rates. Other non-interest expense decreased from the 3^rd quarter of 2018 partly due to lower professional fees and travel and entertainment expenses.

Income Taxes

The effective tax rate for the Company was 21.0% in the current quarter, 21.1% in the previous quarter, and 19.1% in the 3^rd quarter of 2018.

Credit Quality

Net loan charge-offs in the 3^rd quarter of 2019 amounted to $11.5 million, compared to $11.3 million in the prior quarter and $9.8 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .32% in both the current and previous quarters and .28% in the 3^rd quarter of last year. Compared to prior quarter, net loan charge-offs on commercial loans increased $122 thousand to $291 thousand, while net loan charge-offs on personal banking loans increased $35 thousand to $11.2 million.

In the 3^rd quarter of 2019, annualized net loan charge-offs on average consumer credit card loans were 4.45%, compared to 4.75% in the previous quarter, and 3.76% in the same quarter last year. Consumer loan net charge-offs were .43% of average consumer loans in the current quarter, .36% in the prior quarter and .42% in the same quarter last year. This quarter, the provision for loan losses totaled $11.0 million, or $500 thousand lower than net loan charge-offs. At September 30, 2019, the allowance totaled $160.7 million, or 1.11% of total loans.

At September 30, 2019, total non-performing assets amounted to $12.2 million, an increase of $205 thousand over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($11.7 million and $502 thousand, respectively). At September 30, 2019, the balance of non-accrual loans, which represented .08% of loans outstanding, included business loans of $7.8 million, business real estate loans of $2.4 million, and personal real estate loans of $1.6 million. Loans more than 90 days past due and still accruing interest totaled $16.3 million at September 30, 2019.

Other

During the 3^rd quarter of 2019, the Company paid a cash dividend of $.26 per common share, representing a 16.1% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock. On August 7, 2019, the Company entered into an accelerated share repurchase agreement (ASR) program. Under the terms of the ASR agreement, the Company paid $150.0 million in cash and received 1,994,327 shares of its common stock in treasury, representing a substantial majority of the shares expected to be delivered in the overall ASR program. The ASR is expected to be completed by the end of 2019, at which time any additional shares will be delivered to the Company. The total number of shares that the Company will receive and the total consideration per share paid ultimately will be determined based on the volume-weighted daily average price of its common stock during the repurchase program. The Company also purchased an additional 581,685 shares of treasury stock during the current quarter at an average price of $58.26.

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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