Commerce Bancshares, Inc. Reports Record Second Quarter Earnings Per Share of $1.01

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced record earnings of
$1.01 per common share for the three months ended June 30, 2018 compared
to $.71 per share in the same quarter last year and $.92 per share in
the prior quarter. Net income attributable to Commerce
Bancshares, Inc. for the second quarter amounted to $110.3 million,
compared to $79.0 million in the second quarter of 2017 and $101.0
million in the prior quarter. For the quarter, the return on
average assets was 1.80%, the return on average common equity was 16.8%,
and the efficiency ratio was 54.1%.

For the six months ended June 30, 2018, earnings per common share
totaled $1.93 compared to $1.36 for the first six months of 2017. Net
income attributable to Commerce Bancshares, Inc. amounted to $211.3
million for the six months ended June 30, 2018 compared to $150.5
million in the comparable period last year, or an increase of 40.4%. Year
to date, the return on average assets was 1.73% and the return on
average common equity was 16.2%.

In making this announcement, David W. Kemper, Chairman and CEO, said,
“We are pleased to report strong earnings growth this quarter as a
result of an increase in top line revenue, along with stable expenses
and low credit costs. Compared to the prior quarter, net interest
income grew $18.1 million but included an equity dividend of $8.9
million this quarter, offset by a comparable securities loss. Excluding
this item, our net interest margin grew 13 basis points this quarter to
3.50%, reflecting increased interest earned on our loan portfolio
coupled with stable deposit costs. Compared to the same period
last year, fee income grew 8.2%, driven mainly by increases in bank
card, trust, swap and deposit fee income. While total average
loan balances were flat with the prior quarter, we experienced growth in
our commercial and industrial, construction, and mortgage loan
portfolios. Our consumer auto loan portfolio declined mostly as a
result of a sale of $25.9 million of auto loans to another financial
institution this quarter.”

Mr. Kemper added, “The U.S. economy remains strong, and our credit
environment continues to be very favorable. For the current
quarter, net loan charge-offs totaled $10.0 million, compared to $10.4
million in the prior quarter and $10.8 million in the same quarter last
year. The decline in net loan charge-offs was mainly the result
of lower personal banking loan losses this quarter. The ratio of
annualized net loan charge-offs to average loans was .29% this quarter
compared to .30% last quarter. Non-performing assets declined
this quarter to $10.5 million, while the provision for loan losses
matched net loan charge-offs and the allowance for loan losses amounted
to $159.5 million, or 1.14% of period end loans.”

Total assets at June 30, 2018 were $24.5 billion, total loans were
$14.0 billion, and total deposits were $20.3 billion. During the
quarter, the Company paid a common cash dividend of $.235 per share,
representing a 9.8% increase over the rate paid in 2017, and also paid
an annualized 6% cash dividend on its preferred stock.

Commerce Bancshares, Inc. is a registered bank holding company
offering a full line of banking services, including investment
management and securities brokerage. The Company currently
operates banking facilities in nine key markets including St. Louis,
Kansas City, Springfield, Central Missouri, Central Illinois, Wichita,
Tulsa, Oklahoma City and Denver. The Company also maintains
commercial offices in Dallas, Houston, Cincinnati, Nashville, Des
Moines, Indianapolis, and Grand Rapids.

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

* * * * * * * * * * * * * * *

For additional information, contactJeffery Aberdeen,
Controllerat 1000 Walnut Street, Suite 700Kansas
City, MO 64106or by telephone at (816) 234-2081Web
Site: http://www.commercebank.comEmail:
mymoney@commercebank.com

COMMERCE BANCSHARES, INC. and SUBSIDIARIESFINANCIAL
HIGHLIGHTS

(Unaudited)(Dollars in thousands, except per share
data)

(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).

COMMERCE BANCSHARES, INC. and SUBSIDIARIESCONSOLIDATED
STATEMENTS OF INCOME

(Unaudited)(In thousands, except per share data)

(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 SUBSIDIARIESCONSOLIDATED
BALANCE SHEETS – PERIOD END

(Unaudited)(In thousands)

COMMERCE BANCSHARES, INC. and SUBSIDIARIESAVERAGE
BALANCE SHEETS

(Unaudited)(In thousands)

June 30,2018

March 31,2018

December 31,2017

September 30,2017

June 30,2017

COMMERCE BANCSHARES, INC. and SUBSIDIARIESAVERAGE
RATES

(Unaudited)

June 30,2018

March 31,2018

December 31,2017

September 30,2017

June 30,

2017

Total investment securities

(1)

Stated on a tax equivalent basis using a federal income tax
rate of 21% in 2018 and 35% in prior periods.

CREDIT QUALITY

(Unaudited)(In thousands, except per share data)

June 30,2018

March 31,2018

December 31,2017

September 30,2017

June 30,2017

June 30,2018

June 30,2017

(.03

)

(.02

)

 

.10

*as a percentage of average loans (excluding loans held for
sale)

COMMERCE BANCSHARES, INC.Management Discussion of Second
Quarter ResultsJune 30, 2018

For the quarter ended June 30, 2018, net income attributable to Commerce
Bancshares, Inc. (net income) amounted to $110.3 million, compared to
$101.0 million in the previous quarter and $79.0 million in the same
quarter last year. The increase in net income over the previous quarter
was the result of 9.4% growth in net interest income and 4.3% growth in
non-interest income. Non-interest expense declined $417 thousand, and
the provision for loan losses also declined. Dividend income of $8.9
million was received on an equity investment that was liquidated,
increasing net interest income this quarter. This income was offset by
securities losses of a comparable amount resulting from the same
transaction. Excluding the above dividend, the net interest margin
increased 13 basis points this quarter to 3.50%. Quarterly average loans
decreased slightly this quarter from the previous quarter, while average
deposits increased $63.2 million. For the quarter, the return on average
assets was 1.80%, the return on average common equity was 16.8%, and the
efficiency ratio was 54.1%.

Balance Sheet Review

During the 2nd quarter of 2018, average loans totaled $13.9
billion, approximately the same as in the prior quarter, and grew $377.7
million, or 2.8%, over the same period last year. Compared to the
previous quarter, average business and construction loans grew $27.6
million and $19.9 million, respectively. Personal real estate loans
increased $16.9 million, while consumer loans declined $46.6 million
this quarter. Within business loans, commercial and industrial loans
grew $35.6 million but were offset by a decline in tax-free lending of
$14.3 million and a slight decline in leasing activities. The growth in
construction loans resulted from an increase in advances and new loans
this quarter, offset by several larger loan paydowns. Customer demand
for adjustable rate personal real estate loans retained by the Company
resulted in the increase noted above. During the quarter, auto loans
totaling $25.9 million were sold to another financial institution, which
was a main factor in lower overall consumer loan totals. Also, home
equity and marine/RV lending declined this quarter, but patient health
care loans continued to increase and totaled $161.8 million at June 30,
2018. During the current quarter, the Company sold certain fixed rate
personal real estate loans totaling $39.9 million, compared to $47.8
million in the prior quarter.

During the 2nd quarter of 2018, total average available for
sale debt securities decreased $164.9 million from the previous quarter
to $8.4 billion, at fair value. The decline in investment securities was
mainly the result of lower average balances of municipal securities,
government-sponsored obligations, and asset-backed securities, partially
offset by increases in the average balances of mortgage-backed
securities. Purchases of securities during the quarter totaled $469.8
million and were offset by sales, maturities and pay downs of $459.0
million. At June 30, 2018, the duration of the investment portfolio was
3.2 years, and maturities and pay downs of approximately $1.2 billion
are expected to occur during the next 12 months.

Total average deposits increased $63.2 million this quarter compared to
the previous quarter. The increase in average deposits resulted mainly
from growth in interest checking (increase of $113.1 million), savings
(increase of $42.1 million), and personal demand (increase of $26.9
million). Business demand and government demand accounts declined $68.0
million and $44.2 million, respectively, this quarter. Compared to the
previous quarter, total average consumer and private banking deposits
increased $74.7 million and $9.0 million respectively, while commercial
banking deposits declined by $32.6 million. The average loans to
deposits ratio was 68.9% in the current quarter and 69.1% in the prior
quarter. The Company’s average borrowings totaled $1.3 billion, a
decline of $221.3 million from the prior quarter’s balance.

Net Interest Income

Net interest income in the 2nd quarter of 2018 amounted to
$211.0 million compared to $192.9 million in the previous quarter, an
increase of $18.1 million. On a tax equivalent basis, net interest
income for the current quarter increased $19.1 million over the previous
quarter to $215.8 million. As noted previously, net interest income this
quarter included a dividend of $8.9 million representing dividend income
on a liquidated equity security which was carried at fair value.
Excluding this item, the current quarter net yield on earning assets
(tax equivalent) was 3.50%, compared to 3.37% in the previous quarter
and 3.18% in the same period last year. Excluding this item, the
increase in net interest income resulted mainly from higher rates on
loan balances coupled with relatively stable funding costs. Also,
inflation income on the Company’s treasury inflation-protected
securities (TIPS) increased $2.5 million this quarter compared to the
previous quarter.

Compared to the previous quarter, interest income on loans (tax
equivalent) increased $7.2 million as a result of higher loan yields,
especially on commercial loans. The average tax-equivalent yield on the
loan portfolio increased 16 basis points this quarter to 4.49%, compared
to 4.33% in the previous quarter.

Interest income on investment securities (tax equivalent) increased
$13.4 million over the previous quarter, mainly due to the item
mentioned above and higher TIPs inflation income. Also, the adjustment
for premium amortization expense on slowing prepayment speeds for
mortgage-backed and asset-backed securities increased interest income
$1.5 million this quarter, due to a higher overall interest rate
environment. The premium amortization adjustment for the prior quarter
totaled $1.5 million. Inflation income on TIPS totaled $4.5 million in
the current quarter and $2.0 million in the previous quarter. The yield
on total investment securities was 3.19% in the current quarter and
2.58% in the previous quarter.

Interest costs on deposits remained low and totaled 32 basis points in
the 2nd quarter of 2018, compared to 28 basis points in the
prior quarter. Interest expense on deposits increased $1.6 million this
quarter compared to the previous quarter due mainly to higher rates on
corporate interest checking and money market accounts, and short-term
jumbo certificates of deposit. Borrowing costs decreased slightly this
quarter mostly due to lower average balances, offset by higher average
rates paid on customer repurchase agreements. The overall rate paid on
interest bearing liabilities was .40%, compared to .36% in the prior
quarter.

Non-Interest Income

In the 2nd quarter of 2018, total non-interest income
amounted to $124.9 million, an increase of $9.5 million, or 8.2%,
compared to the same period last year. Also, current quarter
non-interest income increased $5.2 million compared to the prior
quarter. The increase in non-interest income over the same period last
year was mainly due to growth in bank card, swap, trust and deposit fee
income.

Total bank card fees in the current quarter increased $5.9 million, or
15.9%, over the same period last year and increased $1.8 million
compared to the prior quarter. The growth compared to the 2nd
quarter of 2017 resulted mainly from growth in net debit card income and
corporate card interchange income. Corporate card net fees grew $4.7
million over the same quarter last year mainly due to growth in
interchange income of 14.2%, coupled with lower network but higher
rewards costs. Debit card net fees grew $1.8 million mostly because of
lower network processing costs. Overall net merchant income was down
10.0% compared to the same quarter last year, but was up 2.1% compared
to the prior quarter. Total bank card fees this quarter were comprised
of fees on corporate card ($24.6 million), debit card ($10.2 million),
merchant ($4.9 million) and credit card ($3.5 million) transactions.

In the current quarter, trust fees increased $3.9 million, or 11.8%,
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 $1.0 million, or 4.5%,
mainly due to growth in corporate cash management fees.

During the 2nd quarter of 2018, swap fees totaled $1.7
million, an increase of $1.3 million over the same period last year,
while loan fees declined $862 thousand, mainly on lower gains on sales
of residential mortgages. Gains on sales of tax credits were solid this
quarter and totaled $1.0 million, which was $304 thousand higher than
the same period last year. Non-interest income this quarter included
$844 thousand of losses on sales of real estate and write downs on
software costs, compared to gains of $1.7 million on the on sales of
real estate and leased assets in the 2nd quarter of 2017.
Non-interest income comprised 37.2% of the Company’s total revenue this
quarter which was down from the same quarter in the prior year but
reflects strong growth in net interest income during the second quarter
of 2018.

Investment Securities Gains and Losses

The Company recorded net securities losses of $3.1 million in the
current quarter and net securities gains of $5.4 million in the prior
quarter.  Net securities losses this quarter included private equity
fair value gains of $3.8 million offset by an adjustment of $8.9 million
(increasing losses) to recognize dividend income on a liquidated equity
investment mentioned above.  Also, other fair value adjustments on other
equity securities totaled $1.8 million this quarter.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $181.9 million,
compared to $176.9 million in the same period last year and $182.3
million in the prior quarter. The 2.8% increase in expense over the same
period last year was mainly due to higher costs for salaries and
benefits and data processing, partly offset by lower operating costs for
occupancy, supplies and communication, and community service.

Compared to the 2nd quarter of last year, salaries and
benefits expense increased $6.8 million, or 6.2%. Salaries expense grew
$5.8 million, mainly due to higher full-time salary costs and growth in
incentive compensation, while benefits expense grew 6.4% mostly due to
higher medical costs. Full-time equivalent employees totaled 4,797 and
4,805 at June 30, 2018 and 2017, respectively.

Data processing costs increased $981 thousand, or 4.9%, mainly due to
higher processing and software costs, while costs for occupancy,
supplies and communication, equipment, and deposit insurance declined a
total of $1.3 million this quarter compared to the same quarter last
year. Marketing costs increased 14.6%, or $654 thousand, mainly due to
new bank card initiatives which are being funded by reduced bank card
network costs. Also, community service costs declined $2.3 million due
to higher foundation contributions made last year.

Income Taxes

The effective tax rate for the Company was 21.1% in the current quarter,
18.7% in the previous quarter, and 29.6% in the 2nd quarter
of 2017.

Credit Quality

Net loan charge-offs in the 2nd quarter of 2018 amounted to
$10.0 million, compared to $10.4 million in the prior quarter and $10.8
million in the same period last year. The ratio of annualized net loan
charge-offs to total average loans was .29% in the current quarter,
compared to .30% in the previous quarter and .32% in the 2nd
quarter of last year. During the 2nd quarter of 2018, the
Company recorded net loan recoveries on commercial loans of $301
thousand, compared to net loan recoveries of $255 thousand in the prior
quarter. Net loan charge-offs on personal banking loans totaled $10.3
million in the current quarter and $10.7 million in the previous quarter.

In the 2nd quarter of 2018, annualized net loan charge-offs
on average consumer credit card loans were 4.39%, compared to 4.05% in
the previous quarter, and 4.25% in the same quarter last year. Consumer
loan net charge-offs were .37% of average consumer loans in the current
quarter, .49% in the prior quarter and .53% in the same quarter last
year. This quarter, the provision for loan losses equaled net loan
charge-offs, and at June 30, 2018, the allowance totaled $159.5 million,
or 1.14% of total loans.

At June 30, 2018, total non-performing assets amounted to $10.5 million,
a $1.1 million decrease from the previous quarter. Non-performing assets
are comprised of non-accrual loans and foreclosed real estate ($9.5
million and $1.0 million, respectively). At June 30, 2018, the balance
of non-accrual loans, which represented .07% of loans outstanding,
included business loans of $5.1 million, business real estate loans of
$2.5 million, and personal real estate loans of $1.9 million. Loans more
than 90 days past due and still accruing interest totaled $13.5 million
at June 30, 2018.

Other

During the 2nd quarter of 2018, the Company paid a cash
dividend of $.235 per common share, representing a 9.8% increase over
the same period last year. The Company also paid an annualized 6% cash
dividend on its preferred stock. The Company purchased 31,764 shares of
treasury stock during the current quarter at an average price of $63.02.

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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