Commerce Bancshares, Inc. Reports Second Quarter Earnings Per Share of $.34

Commerce Bancshares, Inc.  (NASDAQ: CBSH) announced earnings of $.34 per common share for the three months ended June 30, 2020, compared to $.91 per share in the same quarter last year and $.44 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the second quarter of 2020 amounted to $39.9 million, compared to $108.0 million in the second quarter of 2019 and $51.9 million in the prior quarter. For the quarter, the return on average assets was .54%, the return on average common equity was 4.77% and the efficiency ratio was 58.1%.

For the six months ended June 30, 2020, earnings per common share totaled $.78 compared to $1.72 for the first six months of 2019. Net income attributable to Commerce Bancshares, Inc. amounted to $91.7 million for the six months ended June 30, 2020 compared to $205.1 million in the comparable period last year. Year to date, the return on average assets was .66% and the return on average common equity was 5.61%.

In announcing these results, John Kemper, Chief Executive Officer, said, “While uncertainty surrounding the U.S. economy continued throughout the second quarter, we are cautiously optimistic about its resilience and encouraged by the strength of our customers and communities. Businesses have begun to reopen and adapt to the evolving COVID-19 operating environment and customer spending is rebounding from its lows in the second quarter. Commerce has always been committed to standing by our customers in difficult times. As part of our commitment, we have suspended foreclosure proceedings, offered fee waivers, and mobilized many internal resources to provide our commercial customers access to funding through the Paycheck Protection Program (PPP). In addition to the pandemic, our country is grappling with new, jarring reminders of the work that needs to be done to create a more just and equitable society, with broadened access to the wealth-creating engine of our economy. Commerce is committed to doing its part to create the positive and enduring change that is needed. Our strong culture, industry-leading capital levels, and commitment to sound credit policy enable us to be a source of stability for our team members, customers and communities in this period of uncertainty."

Mr. Kemper continued, “While net income was lower this quarter, it was mainly impacted by additional reserves recorded for future loan losses. Excluding the provision for credit losses and securities losses, net income grew modestly over the first quarter. A slight increase in net interest income and lower expense more than offset the decline in fee income this quarter. Compared to the prior quarter, consumer and business spending declined significantly, which negatively impacted bank card revenue. The PPP loan program drove tremendous growth in business loans this quarter, overshadowing strong growth in personal real estate loans. We secured funding for 7,443 customers to receive $1.5 billion in PPP loans, with a median loan size of $34 thousand. The net interest margin declined 39 basis points this quarter, reflecting not only the significant decline in interest rates over the past quarter, but also the rapid growth in deposits during the current quarter, which substantially increased our low-yielding balances held at the Federal Reserve.”

Mr. Kemper continued, "This quarter net loan charge-offs totaled $8.4 million, compared to $10.9 million in the prior quarter and $11.3 million in the second quarter of 2019. The ratio of annualized net loan charge-offs to average loans was .21% in the current quarter, .30% in the prior quarter and .32% in the second quarter of last year. Net loan charge-offs on commercial loans totaled $3.2 million this quarter. Net loan charge-offs on personal banking loans decreased $6.1 million to $5.2 million, mostly the result of new payment relief programs, which lowered consumer credit card loan net charge-offs noticeably this quarter. Further, while net charge-offs were mostly uneventful this quarter, the provision for credit losses exceeded net loan charge-offs by $72.1 million, as the economic forecast utilized in our CECL model deteriorated significantly from our expectation at the end of the first quarter, driving a second consecutive quarter of substantial increases to our reserves.”

Total assets at June 30, 2020 were $30.5 billion, total loans were $16.4 billion, and total deposits were $24.5 billion. During the quarter, the Company paid a common cash dividend of $.27 per share, representing an 8.9% increase over the rate paid in 2019, and also paid an annualized 6% cash dividend on its preferred stock.

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES FINANCIAL HIGHLIGHTS
		For the Three Months Ended									For the Six Months Ended
(Unaudited) (Dollars in thousands, except per share data)		June 30, 2020			March 31, 2020			June 30, 2019			June 30, 2020		June 30, 2019
FINANCIAL SUMMARY
Net interest income		$203,057			$201,065			$211,634			$404,122		$415,122
Non-interest income		117,515			123,663			127,259			241,178		248,499
Total revenue		320,572			324,728			338,893			645,300		663,621
Investment securities losses, net		(4,129)			(13,301)			(110)			(17,430)		(1,035)
Provision for credit losses		80,539			57,953			11,806			138,492		24,269
Non-interest expense		187,512			193,698			189,779			381,210		381,204
Income before taxes		48,392			59,776			137,198			108,168		257,113
Income taxes		9,661			10,173			28,899			19,834		51,759
Non-controlling interest (income) expense		(1,132)			(2,254)			328			(3,386)		245
Net income attributable to Commerce Bancshares, Inc.		39,863			51,857			107,971			91,720		205,109
Preferred stock dividends		2,250			2,250			2,250			4,500		4,500
Net income available to common shareholders		$37,613			$49,607			$105,721			$87,220		$200,609
Earnings per common share:
Net income — basic		$.34			$.44			$.91			$.78		$1.72
Net income — diluted		$.34			$.44			$.91			$.78		$1.72
Effective tax rate		19.51		%	16.40		%	21.11		%	17.78	%	20.15		%
Tax equivalent net interest income		$206,253			$204,402			$215,203			$410,655		$422,307
Average total interest earning assets (1)		$	28,193,312		$	24,691,014		$	23,939,495		$26,442,163		$	23,907,357
Diluted wtd. average shares outstanding		110,896,858			111,375,938			115,239,850			111,136,398		115,526,352
RATIOS
Average loans to deposits (2)		69.22		%	72.57		%	70.97		%	70.78	%	70.96		%
Return on total average assets		.54			0.80			1.73			.66		1.66
Return on average common equity (3)		4.77			6.48			14.46			5.61		14.06
Non-interest income to total revenue		36.66			38.08			37.55			37.37		37.45
Efficiency ratio (4)		58.10			59.17			55.88			58.64		57.29
Net yield on interest earning assets		2.94			3.33			3.61			3.12		3.56
EQUITY SUMMARY
Cash dividends per common share		$.270			$.270			$.248			$.540		$.496
Cash dividends on common stock		$30,174			$30,292			$28,682			$60,466		$57,540
Cash dividends on preferred stock		$2,250			$2,250			$2,250			$4,500		$4,500
Book value per common share (5)		$28.81			$27.86			$26.22
Market value per common share (5)		$59.47			$50.35			$56.82
High market value per common share		$69.77			$71.92			$59.01
Low market value per common share		$48.06			$45.51			$53.93
Common shares outstanding (5)		111,533,315			111,535,295			115,424,027
Tangible common equity to tangible assets (6)		10.12		%	11.13		%	11.25		%
Tier I leverage ratio		10.78		%	11.13		%	11.75		%
OTHER QTD INFORMATION
Number of bank/ATM locations		312			317			319
Full-time equivalent employees		4,856			4,854			4,857

(1)		Excludes allowance for credit losses on loans 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 2019.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
		For the Three Months Ended										For the Six Months Ended
(Unaudited) (In thousands, except per share data)		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		June 30, 2020		June 30, 2019
Interest income		$213,323		$221,485		$226,665		$231,743		$238,412		$434,808		$466,277
Interest expense		10,266		20,420		24,006		28,231		26,778		30,686		51,155
Net interest income		203,057		201,065		202,659		203,512		211,634		404,122		415,122
Provision for credit losses		80,539		57,953		15,206		10,963		11,806		138,492		24,269
Net interest income after credit losses		122,518		143,112		187,453		192,549		199,828		265,630		390,853
NON-INTEREST INCOME
Bank card transaction fees		33,745		40,200		41,079		44,510		42,646		73,945		82,290
Trust fees		37,942		39,965		40,405		39,592		38,375		77,907		75,631
Deposit account charges and other fees		22,279		23,677		24,974		24,032		23,959		45,956		46,977
Capital market fees		3,772		3,790		2,536		1,787		1,944		7,562		3,823
Consumer brokerage services		3,011		4,077		4,139		4,030		3,888		7,088		7,635
Loan fees and sales		4,649		3,235		3,465		4,755		4,238		7,884		7,547
Other		12,117		8,719		26,863		14,037		12,209		20,836		24,596
Total non-interest income		117,515		123,663		143,461		132,743		127,259		241,178		248,499
INVESTMENT SECURITIES GAINS (LOSSES), NET		(4,129)		(13,301)		(248)		4,909		(110)		(17,430)		(1,035)
NON-INTEREST EXPENSE
Salaries and employee benefits		126,759		128,937		126,901		123,836		120,062		255,696		242,190
Net occupancy		11,269		11,748		12,218		12,293		11,145		23,017		22,646
Equipment		4,755		4,821		4,859		4,941		4,790		9,576		9,261
Supplies and communication		4,427		4,658		4,851		5,106		5,275		9,085		10,437
Data processing and software		23,837		23,555		23,934		23,457		23,248		47,392		45,508
Marketing		3,801		5,979		3,951		6,048		6,015		9,780		11,915
Other		12,664		14,000		18,460		15,339		19,244		26,664		39,247
Total non-interest expense		187,512		193,698		195,174		191,020		189,779		381,210		381,204
Income before income taxes		48,392		59,776		135,492		139,181		137,198		108,168		257,113
Less income taxes		9,661		10,173		28,214		29,101		28,899		19,834		51,759
Net income		38,731		49,603		107,278		110,080		108,299		88,334		205,354
Less non-controlling interest expense (income)		(1,132)		(2,254)		398		838		328		(3,386)		245
Net income attributable to Commerce Bancshares, Inc.		39,863		51,857		106,880		109,242		107,971		91,720		205,109
Less preferred stock dividends		2,250		2,250		2,250		2,250		2,250		4,500		4,500
Net income available to common shareholders		$37,613		$49,607		$104,630		$106,992		$105,721		$87,220		$200,609
Net income per common share — basic		$.34		$.44		$.94		$.93		$.91		$.78		$1.72
Net income per common share — diluted		$.34		$.44		$.93		$.93		$.91		$.78		$1.72
OTHER INFORMATION
Return on total average assets		.54	%	.80	%	1.65	%	1.72	%	1.73	%	.66	%	1.66	%
Return on average common equity (1)		4.77		6.48		13.90		14.21		14.46		5.61		14.06
Efficiency ratio (2)		58.10		59.17		56.29		56.66		55.88		58.64		57.29
Effective tax rate		19.51		16.40		20.88		21.04		21.11		17.78		20.15
Net yield on interest earning assets		2.94		3.33		3.36		3.43		3.61		3.12		3.56
Tax equivalent net interest income		$206,253		$204,402		$206,156		$206,958		$215,203		$410,655		$422,307

(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)		June 30, 2020			March 31, 2020			June 30, 2019
ASSETS
Loans
Business		$	6,858,217		$	5,773,865		$	5,257,682
Real estate — construction and land		932,022			873,402			909,784
Real estate — business		2,941,163			2,960,308			2,867,831
Real estate — personal		2,690,542			2,464,819			2,160,515
Consumer		1,966,707			1,941,787			1,927,623
Revolving home equity		334,627			349,735			357,406
Consumer credit card		666,597			706,753			776,333
Overdrafts		5,179			3,143			3,074
Total loans		16,395,054			15,073,812			14,260,248
Allowance for credit losses on loans		(240,744)			(171,653)			(161,182)
Net loans		16,154,310			14,902,159			14,099,066
Loans held for sale		12,785			6,214			20,067
Investment securities:
Available for sale debt securities		10,317,427			8,678,586			8,682,303
Trading debt securities		28,813			24,291			36,508
Equity securities		4,128			4,038			4,744
Other securities		117,761			155,074			130,038
Total investment securities		10,468,129			8,861,989			8,853,593
Federal funds sold and short-term securities purchased under agreements to resell		—			400			—
Long-term securities purchased under agreements to resell		850,000			850,000			700,000
Interest earning deposits with banks		1,404,968			474,156			492,318
Cash and due from banks		391,268			401,185			456,192
Premises and equipment — net		368,565			369,745			363,554
Goodwill		138,921			138,921			138,921
Other intangible assets — net		7,179			8,433			8,763
Other assets		699,996			779,815			639,700
Total assets		$	30,496,121		$	26,793,017		$	25,772,174
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	9,700,261		$	6,952,236		$	6,274,838
Savings, interest checking and money market		12,792,993			12,049,279			11,452,849
Certificates of deposit of less than $100,000		590,635			619,758			613,505
Certificates of deposit of $100,000 and over		1,443,078			1,154,590			1,488,416
Total deposits		24,526,967			20,775,863			19,829,608
Federal funds purchased and securities sold under agreements to repurchase		1,740,438			1,428,013			2,394,294
Other borrowings		1,475			756,461			4,510
Other liabilities		869,072			580,216			372,399
Total liabilities		27,137,952			23,540,553			22,600,811
Stockholders’ equity:
Preferred stock		144,784			144,784			144,784
Common stock		563,978			563,978			559,432
Capital surplus		2,136,874			2,133,623			2,077,491
Retained earnings		232,082			224,643			384,232
Treasury stock		(69,112)			(69,149)			(106,106)
Accumulated other comprehensive income		349,261			253,136			108,898
Total stockholders’ equity		3,357,867			3,251,015			3,168,731
Non-controlling interest		302			1,449			2,632
Total equity		3,358,169			3,252,464			3,171,363
Total liabilities and equity		$	30,496,121		$	26,793,017		$	25,772,174

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)	For the Three Months Ended
	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
ASSETS:
Loans:
Business	$	6,760,827		$	5,493,657		$	5,362,020		$	5,263,312		$	5,142,794
Real estate — construction and land	895,648			924,086			901,367			920,206			908,777
Real estate — business	2,962,076			2,853,632			2,820,189			2,883,379			2,868,503
Real estate — personal	2,582,484			2,390,716			2,283,530			2,175,156			2,135,048
Consumer	1,944,265			1,950,491			1,961,631			1,924,434			1,907,979
Revolving home equity	343,210			350,256			347,527			354,040			361,673
Consumer credit card	663,911			727,569			749,056			763,377			766,080
Overdrafts	2,912			4,044			18,322			9,240			4,889
Total loans	16,155,333			14,694,451			14,443,642			14,293,144			14,095,743
Allowance for credit losses on loans	(171,616)			(139,482)			(159,776)			(160,387)			(161,403)
Net loans	15,983,717			14,554,969			14,283,866			14,132,757			13,934,340
Loans held for sale	6,363			12,875			15,363			19,882			20,731
Investment securities:
U.S. government and federal agency obligations	776,240			802,556			826,702			825,544			843,974
Government-sponsored enterprise obligations	114,518			134,296			184,973			181,929			199,506
State and municipal obligations	1,285,427			1,222,595			1,207,584			1,172,259			1,222,008
Mortgage-backed securities	5,325,720			4,685,782			4,685,794			4,712,508			4,614,703
Asset-backed securities	1,342,518			1,182,556			1,258,297			1,297,685			1,412,452
Other debt securities	406,665			321,733			331,167			334,218			331,459
Unrealized gain (loss) on debt securities	281,457			191,275			149,591			152,706			42,009
Total available for sale debt securities	9,532,545			8,540,793			8,644,108			8,676,849			8,666,111
Trading debt securities	31,981			34,055			32,518			29,622			30,169
Equity securities	4,137			4,273			4,200			4,705			4,717
Other securities	139,250			144,096			141,501			134,896			130,433
Total investment securities	9,707,913			8,723,217			8,822,327			8,846,072			8,831,430
Federal funds sold and short-term securities purchased under agreements to resell	92			326			714			1,080			1,601
Long-term securities purchased under agreements to resell	850,000			850,000			849,986			713,030			700,000
Interest earning deposits with banks	1,755,068			601,420			390,134			226,582			331,999
Other assets	1,461,528			1,368,464			1,315,395			1,292,191			1,251,555
Total assets	$	29,764,681		$	26,111,271		$	25,677,785		$	25,231,594		$	25,071,656
LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	8,843,408		$	6,615,108		$	6,552,862		$	6,290,036		$	6,335,620
Savings	1,111,397			952,709			924,282			924,581			929,974
Interest checking and money market	11,441,694			10,777,400			10,618,347			10,409,111			10,642,648
Certificates of deposit of less than $100,000	605,136			622,840			626,944			620,138			605,440
Certificates of deposit of $100,000 and over	1,346,069			1,299,443			1,434,309			1,503,805			1,378,402
Total deposits	23,347,704			20,267,500			20,156,744			19,747,671			19,892,084
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1,991,971			1,990,051			1,836,982			1,884,939			1,793,526
Other borrowings	345,162			161,698			94,471			77,248			1,318
Total borrowings	2,337,133			2,151,749			1,931,453			1,962,187			1,794,844
Other liabilities	763,524			466,980			458,094			390,560			307,433
Total liabilities	26,448,361			22,886,229			22,546,291			22,100,418			21,994,361
Equity	3,316,320			3,225,042			3,131,494			3,131,176			3,077,295
Total liabilities and equity	$	29,764,681		$	26,111,271		$	25,677,785		$	25,231,594		$	25,071,656

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE RATES
(Unaudited)	For the Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
ASSETS:
Loans:
Business (1)	2.91	%	3.50	%	3.59	%	3.85	%	4.02	%
Real estate — construction and land	3.95		4.78		5.05		5.46		5.63
Real estate — business	3.71		4.16		4.22		4.42		4.60
Real estate — personal	3.69		3.83		3.85		3.91		3.97
Consumer	4.48		4.78		4.76		4.88		4.77
Revolving home equity	3.50		4.61		4.76		5.17		5.20
Consumer credit card	11.76		12.26		12.11		12.42		12.33
Overdrafts	—		—		—		—		—
Total loans	3.80		4.39		4.47		4.71		4.82
Loans held for sale	8.03		6.15		5.32		6.15		6.98
Investment securities:
U.S. government and federal agency obligations	.46		2.09		2.16		2.36		4.66
Government-sponsored enterprise obligations	3.51		4.19		2.17		2.69		2.32
State and municipal obligations (1)	2.97		3.11		3.05		3.14		3.18
Mortgage-backed securities	2.17		2.37		2.72		2.61		2.70
Asset-backed securities	2.25		2.63		2.62		2.80		2.79
Other debt securities	2.49		2.94		2.82		2.63		2.68
Total available for sale debt securities	2.18		2.54		2.69		2.69		2.97
Trading debt securities (1)	2.93		2.52		2.81		2.91		3.14
Equity securities (1)	48.42		46.78		49.40		35.67		35.97
Other securities (1)	4.36		5.31		6.58		6.19		6.69
Total investment securities	2.24		2.61		2.78		2.76		3.04
Federal funds sold and short-term securities purchased under agreements to resell	—		2.47		2.22		2.57		2.76
Long-term securities purchased under agreements to resell	5.08		3.53		2.26		2.01		2.11
Interest earning deposits with banks	.10		.86		1.61		2.17		2.40
Total interest earning assets	3.09		3.66		3.75		3.90		4.05
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.09		.11		.11		.11		.11
Interest checking and money market	.13		.30		.35		.38		.38
Certificates of deposit of less than $100,000	.93		1.15		1.16		1.11		1.01
Certificates of deposit of $100,000 and over	1.08		1.62		1.79		1.99		2.02
Total interest bearing deposits	.25		.45		.52		.58		.55
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	.12		.96		1.20		1.74		1.80
Other borrowings	.82		.82		2.05		2.33		1.52
Total borrowings	.22		.95		1.25		1.76		1.80
Total interest bearing liabilities	.25	%	.52	%	.61	%	.73	%	.70	%
Net yield on interest earning assets	2.94	%	3.33	%	3.36	%	3.43	%	3.61	%

(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 Six Months Ended
(Unaudited) (In thousands, except per share data)		June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			June 30, 2020			June 30, 2019
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period		$	171,653		$	160,682		$	160,682		$	161,182		$	160,682		$	160,682		$	159,932
Adoption of ASU 2016-13		—			(21,039)			—			—			—			(21,039)			—
Provision for credit losses on loans		77,491			42,868			15,206			10,963			11,806			120,359			24,269
Net charge-offs (recoveries):
Commercial portfolio:
Business		3,249			(373)			3,036			335			284			2,876			731
Real estate — construction and land		—			—			—			—			(101)			—			(117)
Real estate — business		(6)			(21)			35			(44)			(14)			(27)			(51)
		3,243			(394)			3,071			291			169			2,849			563
Personal banking portfolio:
Consumer credit card		3,584			9,157			8,829			8,568			9,066			12,741			18,024
Consumer		1,362			1,711			2,838			2,069			1,723			3,073			3,647
Overdraft		316			426			507			446			253			742			570
Real estate — personal		(71)			(4)			6			(30)			(21)			(75)			80
Revolving home equity		(34)			(38)			(45)			119			116			(72)			135
		5,157			11,252			12,135			11,172			11,137			16,409			22,456
Total net loan charge-offs		8,400			10,858			15,206			11,463			11,306			19,258			23,019
Balance at end of period		$	240,744		$	171,653		$	160,682		$	160,682		$	161,182		$	240,744		$	161,182
LIABILITY FOR UNFUNDED LENDING COMMITMENTS		$	35,299		$	32,250		$	1,075		$	1,075		$	1,075
NET CHARGE-OFF RATIOS (1)
Commercial portfolio:
Business		.19		%	(.03		%)	.22		%	.03		%	.02		%	.09		%	.03		%
Real estate — construction and land		—			—			—			—			(.04)			—			(.03)
Real estate — business		—			—			—			(.01)			—			—			—
		.12			(.02)			.13			.01			.01			.06			.01
Personal banking portfolio:
Consumer credit card		2.17			5.06			4.68			4.45			4.75			3.68			4.70
Consumer		.28			.35			.57			.43			.36			.32			.38
Overdraft		43.65			42.37			10.98			19.15			20.76			42.90			25.27
Real estate — personal		(.01)			—			—			(.01)			—			(.01)			.01
Revolving home equity		(.04)			(.04)			(.05)			.13			.13			(.04)			.07
		.37			.83			.90			.85			.86			.60			.87
Total		.21		%	.30		%	.42		%	.32		%	.32		%	.25		%	.33		%
CREDIT QUALITY RATIOS
Non-performing assets to total loans		.14		%	.07		%	.07		%	.08		%	.08		%
Non-performing assets to total assets		.08			.04			.04			.05			.05
Allowance for credit losses on loans to total loans (2)		1.47			1.14			1.09			1.11			1.13
NON-PERFORMING ASSETS
Non-accrual loans:
Business		$	19,034		$	7,356		$	7,489		$	7,753		$	8,428
Real estate — construction and land		1			2			2			3			3
Real estate — business		1,921			1,532			1,030			2,359			950
Real estate — personal		1,679			1,743			1,699			1,618			1,752
Total		22,635			10,633			10,220			11,733			11,133
Foreclosed real estate		422			422			365			502			897
Total non-performing assets		$	23,057		$	11,055		$	10,585		$	12,235		$	12,030
Loans past due 90 days and still accruing interest		$	24,583		$	16,520		$	19,859		$	16,308		$	16,532

(1)		As a percentage of average loans (excluding loans held for sale).
(2)		Excluding PPP loans, Allowance for credit losses on loans to total loans was 1.62% as of June 30, 2020.

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2020

For the quarter ended June 30, 2020, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $39.9 million, compared to $51.9 million in the previous quarter and $108.0 million in the same quarter last year. The decrease in net income from the previous quarter was primarily the result of an increase in the provision for credit losses. Non-interest income was lower this quarter than in the prior quarter, but non-interest expense also declined by a similar amount. Securities losses decreased this quarter mostly due to lower fair value adjustments on the Company’s private equity investment portfolio. While net interest income increased this quarter, the net interest margin decreased as the contraction of average rates on loans and investment securities was only modestly offset by the declining rate paid on interest bearing liabilities and growth in interest earning assets. Average loans increased $1.5 billion over the previous quarter, while average deposits increased $3.1 billion. For the quarter, the return on average assets was .54%, the return on average common equity was 4.77%, and the efficiency ratio was 58.1%.

Balance Sheet Review

During the 2^nd quarter of 2020, average loans totaled $16.2 billion, and increased $1.5 billion over the prior quarter, and grew $2.1 billion, or 14.6%, over the same quarter last year. Period-end loans grew $1.3 billion over the prior quarter and $2.1 billion over June 30, 2019. Compared to the previous quarter, average loan growth was primarily driven by increases in business, personal real estate, and business real estate loans of $1.3 billion, $191.8 million, and $108.4 million, respectively. This growth was partly offset by a decline in consumer credit card loans of $63.7 million. Growth in business loans was the result of demand for Paycheck Protection Plan (PPP) loans, while personal real estate loan balances grew due to a higher portion of loans originated being retained rather than sold during the 2^nd quarter of 2020 compared to the previous quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $832 thousand, compared to $39.3 million in the prior quarter, as late in the current quarter the Company resumed selling loans in the secondary market after temporarily pausing sales in the prior quarter.

Total average available for sale debt securities increased $991.8 million over the previous quarter to $9.5 billion, at fair value. The increase in investment securities was mainly the result of growth in mortgage-backed and asset-backed securities. Purchases of securities during the quarter totaled $2.3 billion, and sales, maturities and pay downs were $733.1 million. At June 30, 2020, the duration of the investment portfolio was 2.8 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits increased $3.1 billion this quarter compared to the previous quarter. The increase in deposits resulted from growth in demand ($2.2 billion), interest checking and money market ($664.3 million), savings deposits ($158.7 million), and certificates of deposit ($28.9 million). Compared to the previous quarter, total average commercial, consumer and wealth deposits (including private banking) grew $2.0 billion, $975.6 million and $161.3 million, respectively. The average loans to deposits ratio was 69.2% in the current quarter and 72.6% in the prior quarter. The Company’s average borrowings, which includes customer repurchase agreements, were $2.3 billion in the 2^nd quarter of 2020 and $2.2 billion in the prior quarter.

Net Interest Income

Net interest income in the 2^nd quarter of 2020 amounted to $203.1 million, an increase of $2.0 million compared to the previous quarter. On a tax equivalent basis, net interest income for the current quarter increased $1.9 million over the previous quarter to $206.3 million. The increase in net interest income was mainly due to lower interest expense on interest bearing liabilities, partly offset by lower income on interest earnings assets. The Company recorded a $1.5 million adjustment to premium amortization on mortgage-backed securities for prepayment speed changes, which lowered interest income this quarter. The net yield on earning assets (tax equivalent) decreased to 2.94%, compared to 3.33% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) decreased $7.8 million, mostly as a result of lower yields on loans, mainly business and business real estate loans and lower average balances of consumer credit card loans. Growth in average business, personal real estate, and business real estate loan balances increased net interest income and partially offset the impact of lower yields. The average tax-equivalent yield on the loan portfolio declined to 3.80%, compared to 4.39% in the previous quarter.

Interest income on investment securities (tax equivalent) decreased $2.9 million from the previous quarter, mainly due to lower interest income earned on U.S. government and federal agency securities as inflation income on treasury inflation-protected securities declined $3.3 million this quarter. An increase in interest income from higher average balances of mortgage-backed securities was partly offset by the $1.5 million premium amortization adjustment, as noted above. The yield on total investment securities was 2.24% in the current quarter, down from 2.61% in the previous quarter.

Interest costs on deposits totaled 25 basis points in the 2^nd quarter of 2020, compared to 45 basis points in the prior quarter. Interest expense on deposits decreased $6.3 million this quarter compared to the previous quarter mainly due to lower rates paid on all deposit categories. Borrowing costs decreased $3.8 million this quarter due to lower rates paid on borrowings, especially securities sold under agreements to repurchase, partially offset by higher average Federal Home Loan Bank borrowings, which were paid off as of June 30, 2020. The overall rate paid on interest bearing liabilities was .25% in the current quarter, compared to .52% in the prior quarter.

Non-Interest Income

In the 2^nd quarter of 2020, total non-interest income amounted to $117.5 million, a decrease of $9.7 million, or 7.7%, compared to the same period last year and decreased $6.1 million, or 5.0%, compared to the prior quarter. The decrease in non-interest income from the same period last year was mainly due to lower bank card, deposit account, and consumer brokerage service fees, partly offset by growth in capital market fees.

Total net bank card fees in the current quarter decreased $8.9 million, or 20.9%, from the same period last year, and decreased $6.5 million, or 16.1%, compared to the prior quarter. Net corporate card fees decreased $5.8 million from the same quarter of last year mainly due to lower transaction volume. Net debit card fees decreased $1.2 million, or 11.7%, mainly due to lower interchange income. Net merchant income declined $1.0 million, or 19.5%, and net credit card fees decreased $965 thousand, or 24.9%, due to lower fee income. Total net bank card fees this quarter were comprised of fees on corporate card ($17.8 million), debit card ($8.8 million), merchant ($4.2 million) and credit card ($2.9 million) transactions.

In the current quarter, trust fees decreased $433 thousand, or 1.1%, from the same period last year, resulting from lower corporate and institutional trust revenue, partially offset by higher private client fee income. Compared to the same period last year, deposit account fees decreased $1.7 million, or 7.0%, mainly due to lower overdraft and return item fees, partly offset by an increase in corporate cash management fees. Additionally, capital market fees grew $1.8 million, or 94.0%, while consumer brokerage service fees decreased $877 thousand, or 22.6%, from amounts recorded in the same quarter last year.

Other non-interest income increased in the 2^nd quarter of 2020 compared to the previous quarter mainly due to fair value adjustments to the Company’s deferred compensation plan assets that are held in a trust and are recorded as both an asset and a liability. Fair value equity adjustments on these assets affecting both other income and other expense increased $4.7 million over the previous quarter. For the 2^nd quarter of 2020, non-interest income comprised 36.7% of the Company’s total revenue.

Investment Securities Gains and Losses

The Company recorded net securities losses of $4.1 million in the current quarter, compared to losses of $13.3 million in the prior quarter and losses of $110 thousand in the 2^nd quarter of 2019. Net securities losses in the current quarter primarily resulted from unrealized losses of $7.5 million in the Company’s private equity investment portfolio, as the economic conditions resulting from the COVID-19 pandemic continued to negatively impact investment valuations. The current quarter’s unrealized losses were partially offset by gains on sales of available for sale securities.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $187.5 million, compared to $189.8 million in the same period last year and $193.7 million in the prior quarter. The decrease in non-interest expense compared to the same period last year was mainly due to lower marketing and other non-interest expense. These decreases were partially offset by higher salaries and employee benefits expense.

Compared to the 2^nd quarter of last year, salaries and employee benefits expense increased $6.7 million, or 5.6%, driven mainly by growth in full-time salary costs and higher incentive compensation expense. Full-time equivalent employees totaled 4,856 and 4,857 at June 30, 2020 and 2019, respectively.

For the current quarter compared to the same quarter of last year, marketing expense decreased $2.2 million, or 36.8%. Other non-interest expense decreased mainly due to higher deferred loan origination costs and lower travel and entertainment expense. These decreases to expense were partly offset by a $1.6 million increase in the Company’s deferred compensation liability, and a $795 thousand impairment on the Company’s mortgage servicing rights during the 2^nd quarter of 2020. Supplies and communication expense decreased $848 thousand due to lower supplies, postage and bank card issuance expense.

Income Taxes

The effective tax rate for the Company was 19.5% in the current quarter, 16.4% in the previous quarter, and 21.1% in the 2^nd quarter of 2019.

Credit Quality

Net loan charge-offs in the 2^nd quarter of 2020 amounted to $8.4 million, compared to $10.9 million in the prior quarter and $11.3 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .21% in the current quarter, .30% in the previous quarter, and .32% in the 2^nd quarter of last year. Compared to the prior quarter, net loan charge-offs on commercial loans increased $3.6 million to $3.2 million, while net loan charge-offs on personal banking loans decreased $6.1 million to $5.2 million.

In the 2^nd quarter of 2020, annualized net loan charge-offs on average consumer credit card loans were 2.17%, compared to 5.06% in the previous quarter, and 4.75% in the same quarter last year. The reduction in net charge-offs during the 2^nd quarter was mainly the result of a relief program that allowed consumer credit card customers to skip payments for up to two months. Consumer loan net charge-offs were .28% of average consumer loans in the current quarter, .35% in the prior quarter and .36% in the same quarter last year.

This quarter, the provision for credit losses on loans totaled $77.5 million and was $69.1 million higher than net loan charge-offs. The increase in the provision for credit losses on loans was driven by a significant deterioration of the economic forecast used in our CECL model as of June 30, 2020 due to the COVID-19 pandemic. At June 30, 2020, the allowance for credit losses on loans totaled $240.7 million, or 1.47% of total loans and 1.62% of total loans, excluding PPP loans. Additionally, the provision for credit losses on unfunded lending commitments increased $3.0 million. The liability for unfunded lending commitments at June 30, 2020 was $35.3 million.

At June 30, 2020, total non-performing assets amounted to $23.1 million, an increase of $12.2 million over the previous quarter, which was mostly related to a single energy loan. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($22.6 million and $422 thousand, respectively). At June 30, 2020, the balance of non-accrual loans, which represented .14% of loans outstanding, included business loans of $19.0 million, business real estate loans of $1.9 million, and personal real estate loans of $1.7 million. Loans more than 90 days past due and still accruing interest totaled $24.6 million at June 30, 2020.

Other

During the 2^nd quarter of 2020, the Company paid a cash dividend of $.27 per common share, representing an 8.9% increase over the same period last year. The Company also paid an annualized 6% cash dividend on its preferred stock.

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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