Commerce Bancshares, Inc. Reports Fourth Quarter Earnings Per Share of $.96

KANSAS CITY, Mo.--(BUSINESS WIRE)--Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.96 per common share for the three months ended December 31, 2018 compared to $.82 per share in the same quarter last year and $.98 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the fourth quarter of 2018 amounted to $109.7 million, compared to $94.4 million in the fourth quarter of 2017 and $112.6 million in the prior quarter. For the current quarter, the return on average assets was 1.75%, the return on average common equity was 15.9%, and the efficiency ratio was 54.5%.

For the year ended December 31, 2018, earnings per common share totaled $3.78 compared to $2.76 in 2017, or an increase of 37%. Net income attributable to Commerce Bancshares, Inc. for the year ended December 31, 2018 increased 36% to $433.5 million compared to $319.4 million last year. For the current year, the return on average assets was 1.76% and the return on average common equity was 16.2%.

In making this announcement, John Kemper, Chief Executive Officer, said, “This quarter we continued to see strong earnings performance as revenue increased $13.8 million, while expenses and credit costs were well controlled. Compared to the prior quarter, net interest income increased $4.5 million, while our net interest margin increased six basis points to 3.58%. The yield on our loan portfolio grew 13 basis points, while funding costs increased only modestly. The diversity of our fee businesses drove growth in non-interest income, which increased $9.4 million this quarter. This growth came from higher bank card, brokerage, swap, and tax credit fees. It also included net gains on branch sales of $7.7 million. Demand for business and business real estate loans improved this quarter and as a result, we experienced growth in new loans and increased line utilization, while seasonal paydowns on some lines of credit partially offset this growth. Average deposits declined slightly.”

Mr. Kemper added, “Overall the economy appears solid and the credit environment remains favorable. Capital and liquidity levels continue to remain very strong. Net loan charge-offs this quarter totaled $12.1 million compared to $9.8 million in the prior quarter and $11.0 million in the same quarter last year. The increase in net loan charge-offs over the prior quarter was mainly due to increased losses of $1.4 million on business loans and higher net loan charge-offs on the Company’s consumer loan portfolio. Credit card net charge-offs remained stable and declined as a percentage of loans this quarter. The ratio of annualized net loan charge-offs to average loans was .34% this quarter compared to .28% last quarter. Non-performing assets increased this quarter to $13.9 million, and the provision for loan losses totaled $12.3 million. At December 31, 2018, the allowance for loan losses amounted to $159.9 million, or 1.13% of period end loans.”

Total assets at December 31, 2018 were $25.5 billion, total loans were $14.2 billion, and total deposits were $20.3 billion. During the fourth quarter, the Company distributed a 5% stock dividend on its common stock. The Company also paid an annualized 6% cash dividend on its preferred stock and a cash dividend of $.224 per common share, as restated for the 5% stock dividend.

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 fourth 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 Year Ended
(Unaudited) (Dollars in thousands, except per share data)	December 31, 2018			September 30, 2018			December 31, 2017			December 31, 2018			December 31, 2017
FINANCIAL SUMMARY
Net interest income	$212,220			$207,754			$190,008			$823,825			$733,679
Non-interest income	133,087			123,714			119,383			501,341			461,263
Total revenue	345,307			331,468			309,391			1,325,166			1,194,942
Investment securities gains (losses), net	(7,129		)	4,306			27,209			(488		)	25,051
Provision for loan losses	12,256			9,999			12,654			42,694			45,244
Non-interest expense	188,625			185,059			208,859			737,821			744,343
Income before taxes	137,297			140,716			115,087			544,163			430,406
Income taxes	26,537			26,647			20,104			105,949			110,506
Non-controlling interest expense	1,108			1,493			628			4,672			517
Net income attributable to Commerce Bancshares, Inc.	109,652			112,576			94,355			433,542			319,383
Preferred stock dividends	2,250			2,250			2,250			9,000			9,000
Net income available to common shareholders	$107,402			$110,326			$92,105			$424,542			$310,383
Earnings per common share:
Net income — basic	$.96			$.99			$.82			$3.79			$2.77
Net income — diluted	$.96			$.98			$.82			$3.78			$2.76
Effective tax rate	19.49		%	19.14		%	17.56		%	19.64		%	25.71		%
Tax equivalent net interest income	$216,281			$211,368			$197,917			$840,062			$766,601
Average total interest earning assets ^(1)	$	23,974,108		$	23,826,980		$	23,926,315		$	23,795,364		$	24,011,034
Diluted wtd. average shares outstanding	110,770,084			111,260,225			111,275,222			111,155,264			111,223,563
RATIOS
Average loans to deposits ^(2)	69.87		%	69.28		%	68.15		%	69.27		%	66.18		%
Return on total average assets	1.75			1.81			1.50			1.76			1.28
Return on average common equity ^(3)	15.85			16.43			14.17			16.16			12.46
Non-interest income to total revenue	38.54			37.32			38.59			37.83			38.60
Efficiency ratio ^(4)	54.53			55.73			67.40			55.58			62.18
Net yield on interest earning assets	3.58			3.52			3.29			3.53			3.19
EQUITY SUMMARY
Cash dividends per common share	$.224			$.224			$.204			$.895			$.816
Cash dividends on common stock	$24,997			$25,059			$22,897			$100,238			$91,619
Cash dividends on preferred stock	$2,250			$2,250			$2,250			$9,000			$9,000
Book value per common share ^(5)	$25.13			$23.84			$22.99
Market value per common share ^(5)	$56.37			$62.88			$53.18
High market value per common share	$64.70			$69.10			$55.15
Low market value per common share	$53.40			$61.26			$49.59
Common shares outstanding ^(5)	111,331,350			111,691,094			111,945,795
Tangible common equity to tangible assets ^(6)	10.45		%	10.10		%	9.84		%
Tier I leverage ratio	11.52		%	11.38		%	10.39		%
OTHER QTD INFORMATION
Number of bank/ATM locations	320			322			327
Full-time equivalent employees	4,795			4,797			4,800

(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 Year Ended
(Unaudited) (In thousands, except per share data)	December 31, 2018		September 30, 2018		June 30, 2018		March 31, 2018		December 31, 2017		December 31, 2018		December 31, 2017
Interest income	$232,832		$224,751		$225,623		$205,995		$201,572		$889,201		$777,407
Interest expense	20,612		16,997		14,664		13,103		11,564		65,376		43,728
Net interest income	212,220		207,754		210,959		192,892		190,008		823,825		733,679
Provision for loan losses	12,256		9,999		10,043		10,396		12,654		42,694		45,244
Net interest income after provision for loan losses	199,964		197,755		200,916		182,496		177,354		781,131		688,435
NON-INTEREST INCOME
Bank card transaction fees	44,481		42,427		43,215		41,453		42,888		171,576		155,100
Trust fees	37,466		37,400		37,036		36,062		35,405		147,964		135,159
Deposit account charges and other fees	23,887		23,755		23,893		22,982		22,598		94,517		90,060
Capital market fees	1,843		1,595		1,992		2,291		1,743		7,721		7,996
Consumer brokerage services	4,184		3,884		3,971		3,768		3,576		15,807		14,630
Loan fees and sales	3,053		3,579		3,229		2,862		3,099		12,723		13,948
Other	18,173		11,074		11,514		10,272		10,074		51,033		44,370
Total non-interest income	133,087		123,714		124,850		119,690		119,383		501,341		461,263
INVESTMENT SECURITIES GAINS (LOSSES), NET	(7,129	)	4,306		(3,075	)	5,410		27,209		(488	)	25,051
NON-INTEREST EXPENSE
Salaries and employee benefits	120,517		116,194		115,589		115,894		115,741		468,194		448,321
Net occupancy	11,711		11,631		11,118		11,584		11,280		46,044		45,612
Equipment	4,508		4,592		4,594		4,431		4,692		18,125		18,568
Supplies and communication	5,095		5,103		5,126		5,313		6,118		20,637		22,790
Data processing and software	22,216		22,056		21,016		20,690		21,090		85,978		80,998
Marketing	5,602		4,999		5,142		4,805		3,937		20,548		16,325
Deposit insurance	1,796		3,167		3,126		3,457		3,444		11,546		13,986
Community service	480		580		656		729		25,511		2,445		34,377
Other	16,700		16,737		15,493		15,374		17,046		64,304		63,366
Total non-interest expense	188,625		185,059		181,860		182,277		208,859		737,821		744,343
Income before income taxes	137,297		140,716		140,831		125,319		115,087		544,163		430,406
Less income taxes	26,537		26,647		29,507		23,258		20,104		105,949		110,506
Net income	110,760		114,069		111,324		102,061		94,983		438,214		319,900
Less non-controlling interest expense	1,108		1,493		994		1,077		628		4,672		517
Net income attributable to Commerce Bancshares, Inc.	109,652		112,576		110,330		100,984		94,355		433,542		319,383
Less preferred stock dividends	2,250		2,250		2,250		2,250		2,250		9,000		9,000
Net income available to common shareholders	$107,402		$110,326		$108,080		$98,734		$92,105		$424,542		$310,383
Net income per common share — basic	$.96		$.99		$.96		$.88		$.82		$3.79		$2.77
Net income per common share — diluted	$.96		$.98		$.96		$.88		$.82		$3.78		$2.76
OTHER INFORMATION
Return on total average assets	1.75	%	1.81	%	1.80	%	1.66	%	1.50	%	1.76	%	1.28	%
Return on average common equity ^(1)	15.85		16.43		16.78		15.58		14.17		16.16		12.46
Efficiency ratio ^(2)	54.53		55.73		54.06		58.21		67.40		55.58		62.18
Effective tax rate	19.49		19.14		21.10		18.72		17.56		19.64		25.71
Net yield on interest earning assets	3.58		3.52		3.65		3.37		3.29		3.53		3.19
Tax equivalent net interest income	$216,281		$211,368		$215,775		$196,638		$197,917		$840,062		$766,601

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - PERIOD END
(Unaudited) (In thousands)	December 31, 2018			September 30, 2018			December 31, 2017
ASSETS
Loans
Business	$	5,106,427		$	4,966,722		$	4,958,554
Real estate — construction and land	869,659			999,691			968,820
Real estate — business	2,875,788			2,726,042			2,697,452
Real estate — personal	2,127,083			2,120,672			2,062,787
Consumer	1,955,572			1,967,465			2,104,487
Revolving home equity	376,399			375,322			400,587
Consumer credit card	814,134			788,111			783,864
Overdrafts	15,236			11,534			7,123
Total loans	14,140,298			13,955,559			13,983,674
Allowance for loan losses	(159,932		)	(159,732		)	(159,532		)
Net loans	13,980,366			13,795,827			13,824,142
Loans held for sale	20,694			16,890			21,398
Investment securities:
Available for sale debt securities	8,538,041			8,674,986			8,725,442
Trading debt securities	27,059			19,676			18,269
Equity securities	4,409			4,467			50,591
Other securities	129,157			127,120			99,005
Total investment securities	8,698,666			8,826,249			8,893,307
Federal funds sold and short-term securities purchased under agreements to resell	3,320			14,375			42,775
Long-term securities purchased under agreements to resell	700,000			700,000			700,000
Interest earning deposits with banks	689,876			334,752			30,631
Cash and due from banks	507,892			443,004			438,439
Land, buildings and equipment — net	333,119			331,869			335,110
Goodwill	138,921			138,921			138,921
Other intangible assets — net	8,794			8,470			7,618
Other assets	382,194			452,035			401,074
Total assets	$	25,463,842		$	25,062,392		$	24,833,415
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	6,980,298		$	6,728,605		$	7,158,962
Savings, interest checking and money market	11,685,239			11,733,057			11,499,620
Certificates of deposit of less than $100,000	586,091			585,765			634,646
Certificates of deposit of $100,000 and over	1,072,031			1,086,193			1,132,218
Total deposits	20,323,659			20,133,620			20,425,446
Federal funds purchased and securities sold under agreements to repurchase	1,956,389			1,862,117			1,507,138
Other borrowings	8,702			1,534			1,758
Other liabilities	237,943			257,311			180,889
Total liabilities	22,526,693			22,254,582			22,115,231
Stockholders’ equity:
Preferred stock	144,784			144,784			144,784
Common stock	559,432			535,407			535,407
Capital surplus	2,084,824			1,804,031			1,815,360
Retained earnings	241,163			493,641			221,374
Treasury stock	(34,236		)	(33,174		)	(14,473		)
Accumulated other comprehensive income (loss)	(64,669		)	(141,596		)	14,108
Total stockholders’ equity	2,931,298			2,803,093			2,716,560
Non-controlling interest	5,851			4,717			1,624
Total equity	2,937,149			2,807,810			2,718,184
Total liabilities and equity	$	25,463,842		$	25,062,392		$	24,833,415

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS
(Unaudited) (In thousands)	For the Three Months Ended
	December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017
ASSETS:
Loans:
Business	$	5,028,635		$	4,926,063		$	4,962,171		$	4,934,621		$	4,818,419
Real estate — construction and land	953,166			992,045			971,854			951,930			948,043
Real estate — business	2,757,595			2,732,968			2,726,697			2,733,812			2,720,356
Real estate — personal	2,122,357			2,110,945			2,078,972			2,062,083			2,044,651
Consumer	1,962,401			1,984,643			2,025,585			2,072,168			2,100,762
Revolving home equity	374,216			373,819			378,366			392,727			394,231
Consumer credit card	788,353			774,512			754,199			757,692			756,544
Overdrafts	5,277			4,704			4,497			4,628			5,295
Total loans	13,992,000			13,899,699			13,902,341			13,909,661			13,788,301
Allowance for loan losses	(158,880		)	(158,840		)	(158,664		)	(158,779		)	(157,026		)
Net loans	13,833,120			13,740,859			13,743,677			13,750,882			13,631,275
Loans held for sale	18,475			18,201			22,202			19,115			18,158
Investment securities:
U.S. government and federal agency obligations	923,545			923,557			923,183			916,655			917,664
Government-sponsored enterprise obligations	214,913			261,938			354,156			405,681			452,104
State and municipal obligations	1,361,079			1,375,768			1,394,766			1,513,243			1,630,660
Mortgage-backed securities	4,379,805			4,434,119			4,067,152			3,925,904			3,949,933
Asset-backed securities	1,518,706			1,427,041			1,407,300			1,469,488			1,622,778
Other debt securities	339,841			339,952			340,246			341,821			351,177
Unrealized gain (loss) on debt securities	(166,181		)	(119,319		)	(122,114		)	(43,238		)	36,875
Total available for sale debt securities	8,571,708			8,643,056			8,364,689			8,529,554			8,961,191
Trading debt securities	26,322			24,490			26,101			21,966			20,401
Equity securities	4,432			4,466			47,179			50,507			82,416
Other securities	127,634			120,206			108,563			100,993			95,485
Total investment securities	8,730,096			8,792,218			8,546,532			8,703,020			9,159,493
Federal funds sold and short-term securities purchased under agreements to resell	14,415			13,042			36,791			44,339			27,017
Long-term securities purchased under agreements to resell	699,999			685,869			700,000			700,000			699,999
Interest earning deposits with banks	352,942			298,632			353,607			273,977			270,222
Other assets	1,158,816			1,147,250			1,119,454			1,145,200			1,157,289
Total assets	$	24,807,863		$	24,696,071		$	24,522,263		$	24,636,533		$	24,963,453
LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	6,666,715		$	6,677,665		$	6,749,104		$	6,824,700		$	7,257,102
Savings	870,844			877,347			881,045			838,900			821,908
Interest checking and money market	10,840,048			10,839,310			10,850,123			10,737,829			10,416,221
Certificates of deposit of less than $100,000	584,828			593,936			609,011			625,319			644,951
Certificates of deposit of $100,000 and over	1,090,546			1,100,299			1,134,900			1,134,194			1,119,352
Total deposits	20,052,981			20,088,557			20,224,183			20,160,942			20,259,534
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1,655,997			1,499,837			1,339,278			1,560,573			1,625,828
Other borrowings	1,335			1,833			1,913			1,913			42,060
Total borrowings	1,657,332			1,501,670			1,341,191			1,562,486			1,667,888
Other liabilities	264,449			296,884			229,080			198,398			312,172
Total liabilities	21,974,762			21,887,111			21,794,454			21,921,826			22,239,594
Equity	2,833,101			2,808,960			2,727,809			2,714,707			2,723,859
Total liabilities and equity	$	24,807,863		$	24,696,071		$	24,522,263		$	24,636,533		$	24,963,453

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE RATES
(Unaudited)	For the Three Months Ended
	December 31, 2018		September 30, 2018		June 30, 2018		March 31, 2018		December 31, 2017
ASSETS:
Loans:
Business^(1)	3.93	%	3.80	%	3.69	%	3.48	%	3.32	%
Real estate — construction and land	5.47		5.21		5.06		4.69		4.41
Real estate — business	4.53		4.35		4.22		4.06		3.90
Real estate — personal	3.87		3.83		3.84		3.80		3.72
Consumer	4.62		4.46		4.39		4.25		4.07
Revolving home equity	4.98		4.72		4.51		4.25		4.06
Consumer credit card	11.91		11.99		12.05		12.06		11.90
Overdrafts	—		—		—		—		—
Total loans	4.72		4.59		4.49		4.33		4.18
Loans held for sale	6.59		6.87		6.72		6.45		5.55
Investment securities:
U.S. government and federal agency obligations	1.90		2.23		3.18		2.12		2.60
Government-sponsored enterprise obligations	2.24		2.10		1.88		1.84		1.69
State and municipal obligations^(1)	3.06		2.98		3.06		3.06		3.60
Mortgage-backed securities	2.75		2.65		2.60		2.62		2.38
Asset-backed securities	2.55		2.42		2.32		2.11		1.94
Other debt securities	2.60		2.59		2.63		2.65		2.56
Total available for sale debt securities	2.65		2.60		2.66		2.52		2.52
Trading debt securities^(1)	3.21		3.13		3.15		2.73		2.63
Equity securities ^(1)	39.92		32.69		89.68		3.64		3.30
Other securities ^(1)	15.51		13.00		6.68		6.73		6.67
Total investment securities	2.86		2.76		3.19		2.58		2.58
Federal funds sold and short-term securities purchased under agreements to resell	2.56		2.10		1.93		1.65		1.35
Long-term securities purchased under agreements to resell	2.31		2.26		2.17		2.38		2.36
Interest earning deposits with banks	2.28		1.96		1.80		1.69		1.18
Total interest earning assets	3.92		3.80		3.90		3.59		3.48
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.11		.11		.11		.12		.12
Interest checking and money market	.30		.26		.23		.20		.17
Certificates of deposit of less than $100,000	.70		.56		.46		.43		.40
Certificates of deposit of $100,000 and over	1.61		1.41		1.23		1.02		.88
Total interest bearing deposits	.41		.35		.32		.28		.24
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1.60		1.33		1.18		1.04		.83
Other borrowings	2.67		2.60		2.52		2.54		3.59
Total borrowings	1.60		1.33		1.19		1.04		.90
Total interest bearing liabilities	.54	%	.45	%	.40	%	.36	%	.31	%
Net yield on interest earning assets	3.58	%	3.52	%	3.65	%	3.37	%	3.29	%

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY
	For the Three Months Ended															For the Year Ended
(Unaudited) (In thousands, except per share data)	December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			December 31, 2018			December 31, 2017
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period	$	159,732		$	159,532		$	159,532		$	159,532		$	157,832		$	159,532		$	155,932
Provision for losses	12,256			9,999			10,043			10,396			12,654			42,694			45,244
Net charge-offs (recoveries):
Commercial portfolio:
Business	1,748			332			36			(14		)	768			2,102			1,378
Real estate — construction and land	(183		)	(119		)	(297		)	(36		)	(87		)	(635		)	(1,191		)
Real estate — business	(91		)	(42		)	(40		)	(205		)	(48		)	(378		)	(203		)
	1,474			171			(301		)	(255		)	633			1,089			(16		)
Personal banking portfolio:
Consumer credit card	7,421			7,340			8,251			7,566			7,724			30,578			30,253
Consumer	2,805			2,091			1,862			2,528			2,184			9,286			9,979
Overdraft	500			351			326			444			376			1,621			1,548
Real estate — personal	(144		)	(153		)	(95		)	57			(56		)	(335		)	(305		)
Revolving home equity	—			(1		)	—			56			93			55			185
	10,582			9,628			10,344			10,651			10,321			41,205			41,660
Total net loan charge-offs	12,056			9,799			10,043			10,396			10,954			42,294			41,644
Balance at end of period	$	159,932		$	159,732		$	159,532		$	159,532		$	159,532		$	159,932		$	159,532
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business	.14		%	.03		%	—		%	—		%	.06		%	.04		%	.03		%
Real estate — construction and land	(.08		)	(.05		)	(.12		)	(.02		)	(.04		)	(.07		)	(.14		)
Real estate — business	(.01		)	(.01		)	(.01		)	(.03		)	(.01		)	(.01		)	(.01		)
	.07			.01			(.01		)	(.01		)	.03			.01			—
Personal banking portfolio:
Consumer credit card	3.73			3.76			4.39			4.05			4.05			3.98			4.07
Consumer	.57			.42			.37			.49			.41			.46			.49
Overdraft	37.59			29.60			29.08			38.91			28.17			33.93			33.71
Real estate — personal	(.03		)	(.03		)	(.02		)	.01			(.01		)	(.02		)	(.02		)
Revolving home equity	—			—			—			.06			.09			.01			.05
	.80			.73			.79			.82			.77			.78			.80
Total	.34		%	.28		%	.29		%	.30		%	.32		%	.30		%	.31		%
CREDIT QUALITY RATIOS
Non-performing assets to total loans	.10		%	.07		%	.08		%	.08		%	.09		%
Non-performing assets to total assets	.05			.04			.04			.05			.05
Allowance for loan losses to total loans	1.13			1.14			1.14			1.15			1.14
NON-PERFORMING ASSETS
Non-accrual loans:
Business	$	8,985		$	5,131		$	5,114		$	5,557		$	5,947
Real estate — construction and land	4			4			5			5			5
Real estate — business	1,715			1,467			2,465			2,546			2,736
Real estate — personal	1,832			1,767			1,888			2,169			2,461
Consumer	—			—			—			—			834
Total	12,536			8,369			9,472			10,277			11,983
Foreclosed real estate	1,413			1,181			1,039			1,300			681
Total non-performing assets	$	13,949		$	9,550		$	10,511		$	11,577		$	12,664
Loans past due 90 days and still accruing interest	$	16,658		$	13,991		$	13,453		$	14,928		$	18,127
*as a percentage of average loans (excluding loans held for sale)

COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2018

For the quarter ended December 31, 2018, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $109.7 million, compared to $112.6 million in the previous quarter and $94.4 million in the same quarter last year. During the 4^th quarter of 2018, non-recurring income totaling $2.9 million ($2.3 million net of tax) was recorded and included a net gain of $7.7 million from the disposition of several branch properties, net securities losses of $7.3 million, and discrete interest and dividends of $2.5 million from the Company’s private equity investments (net of minority interest). Overall the net interest margin grew six basis points, mainly due to higher loan rates and stable funding costs. Excluding the branch gains, non-interest income grew $1.7 million compared to the prior quarter from continued growth in the Company’s diverse revenue sources including bank card, tax credit, swap and brokerage fees. Non-interest expense increased $3.6 million this quarter due to higher salaries and marketing costs. Quarterly average loans increased $92.6 million this quarter over the previous quarter, while average deposits decreased $35.6 million. For the quarter, the return on average assets was 1.75%, the return on average common equity was 15.9%, and the efficiency ratio was 54.5%.

Balance Sheet Review

During the 4^th quarter of 2018, average loans totaled $14.0 billion, an increase of $92.6 million over the prior quarter, and grew $204.0 million, or 1.5%, over the same period last year. Period-end loans, however, increased $188.5 million over the prior quarter. Compared to the previous quarter, average business, business real estate, consumer card, and personal real estate loans grew $102.6 million, $24.6 million, $13.8 million, and $11.4 million, respectively. However, this growth was partly offset by a decline in average construction (decline of $38.9 million) and auto (decline of $12.5 million) lending activities. Business loan demand was solid this quarter with several new large loans closed and increased line utilization, notably from agribusiness customers, but this growth was partly offset by some large seasonal loan paydowns. Several larger business real estate loans were also closed this quarter. The decline in construction loans resulted from projects being completed and loans either moved to permanent financing on balance sheet (business real estate) or financed outside of the bank. Also, personal real estate loans grew modestly due to continued demand for adjustable rate mortgages which are kept on-balance sheet. Consumer loans declined $22.2 million due to lower demand for automobile lending and fixed home equity loans. Consumer card balances grew throughout the year and were seasonally higher in the 4^th quarter of 2018. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $49.7 million, compared to $56.1 million in the prior quarter.

During the 4^th quarter of 2018, total average available for sale debt securities decreased $71.3 million from the previous quarter to $8.6 billion, at fair value. The decrease in investment securities was mainly the result of lower mortgage-backed, government-sponsored enterprise obligations and municipal securities, partly offset by higher average balances of asset-backed securities. Purchases of securities during the quarter totaled $597.8 million and were offset by sales, maturities and pay downs of $820.0 million. At December 31, 2018, the duration of the investment portfolio was 3.2 years, and maturities and pay downs of approximately $1.0 billion are expected to occur during the next 12 months.

Total average deposits decreased $35.6 million this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from lower balances of certificates of deposit (decline of $18.9 million), savings (decline of $6.5 million), and personal and government demand deposits (decline of $79.9 million). These declines were partially offset by a $60.9 million increase in business demand deposits this quarter. Overall, compared to the previous quarter, total average consumer and wealth (including private banking) deposits decreased $59.2 million and $20.4 million, respectively, while average commercial banking deposits grew $46.9 million. The average loans to deposits ratio was 69.9% in the current quarter and 69.3% in the prior quarter. The Company’s average borrowings were $1.7 billion in the 4^th quarter of 2018, an increase of $155.7 million over the prior quarter’s balance.

Net Interest Income

Net interest income in the 4^th quarter of 2018 amounted to $212.2 million compared to $207.8 million in the previous quarter, an increase of $4.5 million. On a tax equivalent basis, net interest income for the current quarter increased $4.9 million over the previous quarter to $216.3 million. As noted previously, net interest income included non-recurring dividend and interest of $3.1 million in the current quarter and $2.0 million in the prior quarter from the Company’s private equity investments. Also, inflation income on the Company’s inflation protected securities (TIPs) declined $980 thousand this quarter. Excluding these items, net interest income grew $4.5 million and the adjusted net yield on earning assets (tax equivalent) was 3.50% compared to 3.45% in the prior quarter.

Compared to the previous quarter, interest income on loans (tax equivalent) increased $5.6 million as a result of higher overall loan yields coupled with growth, mainly in business loan balances. The average tax-equivalent yield on the loan portfolio increased 13 basis points this quarter to 4.72%, compared to 4.59% in the previous quarter.

Interest income on investment securities (tax equivalent) increased $2.2 million over the previous quarter, mainly due to higher rates and balances on the Company’s asset-backed securities and the discrete dividends received on the Company’s equity investments noted above. Also, the adjustment for premium amortization expense on slowing prepayment speeds for mortgage-backed and asset-backed securities increased interest income $670 thousand this quarter. However, inflation income on TIPs securities declined $980 thousand to $1.5 million this quarter. The yield on total investment securities was 2.86% in the current quarter and 2.76% in the previous quarter.

Interest costs on deposits remained low and totaled 41 basis points in the 4^th quarter of 2018, compared to 35 basis points in the prior quarter. Interest expense on deposits increased $2.0 million this quarter compared to the previous quarter mainly due to higher rates on most deposit categories. Borrowing costs increased $1.7 million this quarter mainly due to higher rates and balances of customer repurchase agreements. The overall rate paid on interest bearing liabilities was .54% in the current quarter, compared to 45% in the prior quarter.

Non-Interest Income

In the 4^th quarter of 2018, total non-interest income amounted to $133.1 million, an increase of $13.7 million, or 11.5%, compared to the same period last year and increased $9.4 million compared to the prior quarter. The current quarter includes net gains of $7.7 million from the disposition of several branch properties (included in other income). Excluding this gain, the increase in non-interest income over the same period last year was mainly due to growth in trust, bank card, deposit, tax credit and brokerage fees.

Total bank card fees in the current quarter increased $1.6 million, or 3.7%, over the same period last year and grew $2.1 million, or 4.8%, compared to the prior quarter. Corporate card net fees grew $2.7 million, or 11.6%, over the same quarter last year mainly due to growth in interchange income from increased customer activity. Debit card net fees grew $219 thousand, or 2.2%, driven by growth in fees of 5.9% but offset by higher network processing costs. Overall net merchant income declined $662 thousand due to lower interchange fees and higher processing costs, while net credit card fees declined $674 thousand on higher rewards costs, partly offset by higher interchange revenue. Total net bank card fees this quarter were comprised of fees on corporate card ($26.1 million), debit card ($10.2 million), merchant ($4.4 million) and credit card ($3.8 million) transactions.

In the current quarter, trust fees increased $2.1 million, or 5.8%, over the same period last year, resulting from growth in private client fee income. Compared to the same period last year, deposit account fees increased $1.3 million, or 5.7%, mainly due to growth in corporate cash management fees and consumer deposit fees.

During the 4^th quarter of 2018, brokerage fees grew 17.0% over the same period last year to $4.2 million, while cash sweep fees grew 26.4% to $2.6 million. Gains on sales of tax credits totaled $2.0 million this quarter, reflecting an increase of $1.3 million over amounts reported in the same quarter last year. Non-interest income comprised 38.5% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $7.1 million in the current quarter, compared to net securities gains of $4.3 million in the prior quarter and $27.2 million in the 4^th quarter of 2017. This quarter, the Company sold securities with a book value of $523.9 million, mainly U.S. Treasury securities, and recorded securities losses of $10.1 million. The proceeds from this sale were reinvested in similar securities with higher rates. Also, gains of $3.1 million (realized and fair value adjustments) were recorded on the Company’s private equity portfolio this quarter.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $188.6 million, compared to $208.9 million in the same period last year and $185.1 million in the prior quarter. The decrease in expense compared to the same period last year was mainly due to a $25.0 million contribution of appreciated securities and a $3.3 million discretionary bonus accrual in 2017 that did not reoccur in 2018, partly offset by higher salaries and benefits, data processing and marketing costs in 2018.

Compared to the 4^th quarter of last year, salaries and benefits expense increased $4.8 million, or 4.1%. Salaries expense grew $3.5 million, due to higher full-time salary costs of $6.3 million, while incentive compensation decreased $3.2 million due to the discretionary bonus mentioned above. Benefits expense increased $1.3 million, due to higher medical, payroll taxes and retirement plan costs. Full-time equivalent employees totaled 4,795 and 4,800 at December 31, 2018 and 2017, respectively.

Marketing costs increased $1.7 million partly due to increased marketing efforts to consumer deposit customers and new bank card initiatives. However, deposit insurance expense declined $1.6 million due to reduced FDIC insurance rates in effect this quarter, partly offsetting the increase in marketing expense. Also, supplies and communication expense declined $1.0 million this quarter on lower data network and postage costs, while data processing costs increased $1.1 million due to higher software expense.

Income Taxes

The effective tax rate for the Company was 19.5% in the current quarter, 19.1% in the previous quarter, and 17.6% in the 4^th quarter of 2017.

Credit Quality

Net loan charge-offs in the 4^th quarter of 2018 amounted to $12.1 million, compared to $9.8 million in the prior quarter and $11.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .34% in the current quarter, compared to .28% in the previous quarter and .32% in the 4^th quarter of last year. During the 4^th quarter of 2018, the Company recorded net loan charge-offs on commercial loans of $1.5 million mainly representing one larger business loan. Net loan charge-offs on personal banking loans totaled $10.6 million in the current quarter and $9.6 million in the previous quarter.

In the 4^th quarter of 2018, annualized net loan charge-offs on average consumer credit card loans were 3.73%, compared to 3.76% in the previous quarter, and 4.05% in the same quarter last year. Consumer loan net charge-offs were .57% of average consumer loans in the current quarter, .42% in the prior quarter and .41% in the same quarter last year. This quarter, the provision for loan losses totaled $12.3 million, slightly higher than net loan charge-offs taken this quarter. At December 31, 2018, the allowance totaled $159.9 million, or 1.13% of total loans.

At December 31, 2018, total non-performing assets amounted to $13.9 million, an increase of $4.4 million over the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($12.5 million and $1.4 million, respectively). At December 31, 2018, the balance of non-accrual loans, which represented .09% of loans outstanding, included business loans of $9.0 million, business real estate loans of $1.7 million, and personal real estate loans of $1.8 million. Loans more than 90 days past due and still accruing interest totaled $16.7 million at December 31, 2018.

Other

During the 4^th quarter of 2018, the Company distributed a 5% stock dividend on its common stock and paid a cash dividend of $.224 per common share (as restated for the stock dividend), 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 578,557 shares of treasury stock during the current quarter at an average price of $61.63.

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.