Commerce Bancshares, Inc. Announces Second Quarter Earnings Per Common Share of $.70

KANSAS CITY, Mo.--(BUSINESS WIRE)--

Commerce Bancshares, Inc. CBSH announced earnings of $.70 per common share for the three months ended June 30, 2016 compared to $.65 per share in the prior quarter and $.72 per share in the second quarter of 2015. Net income attributable to Commerce Bancshares, Inc. for the second quarter amounted to $69.9 million, compared to $65.4 million in the prior quarter and $74.4 million in the same quarter last year. For the quarter, the return on average assets was 1.15%, the return on average common equity was 11.7% and the efficiency ratio was 61.3%.

For the six months ended June 30, 2016, earnings per common share totaled $1.35 compared to $1.30 for the first six months of 2015. Net income attributable to Commerce Bancshares, Inc. amounted to $135.3 million for the six months ended June 30, 2016 compared to $135.4 million last year. For the first six months of 2016, the return on average assets was 1.11% and the return on average common equity was 11.4%.

In making this announcement, David W. Kemper, Chairman and CEO, said, "This quarter we continued to experience strong loan growth, improved net interest income, low credit losses and stable expenses. Average loans have grown over $300 million in each of the last three quarters, and growth in these higher earning assets has helped us manage the effects of continued low interest rates. Average deposits also grew $301.7 million this quarter, or 6% annualized, and funding costs remained low. Net interest income grew $8.1 million this quarter compared to the prior quarter, helped by higher loan interest and an increase in interest on inflation-protected securities. Core fee income continued to show good growth from deposit, trust, and mortgage banking activities. Non-interest expense totaled $177.1 million and reflected a slight decline from the previous quarter."

Mr. Kemper continued, "Net loan charge-offs for the current quarter totaled $7.5 million, compared to $8.8 million in both the previous quarter and the second quarter of 2015. The decrease in net loan charge-offs compared to the previous quarter was largely due to increased commercial loan recoveries, especially in construction and business real estate loans, offset by slightly higher personal banking loan net losses. During the current quarter, the provision for loan losses totaled $9.2 million, or $1.7 million higher than net loan charge-offs, but slightly less than the prior quarter. The allowance for loan losses increased to $153.8 million at June 30, 2016, or 1.18% of period end loans. Total non-performing assets decreased $5.2 million from the previous quarter to $26.1 million this quarter."

Total assets at June 30, 2016 were $24.7 billion, total loans were $13.1 billion, and total deposits were $20.2 billion. During the quarter, the Company paid a common cash dividend of $.225 per share, representing a 5% increase over the rate paid in 2015 and also paid a 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 in approximately 350 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado. The Company also has operating subsidiaries involved in credit related insurance and private equity activities.

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, contact
Jeffery Aberdeen, Controller
at 1000 Walnut Street, Suite 700
Kansas City, MO 64106
or by telephone at (816) 234-2081
Web Site: http://www.commercebank.com
Email: mymoney@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, 2016				March 31, 2016				June 30, 2015				June 30, 2016				June 30, 2015
FINANCIAL SUMMARY
Net interest income		$171,829				$163,775				$163,657				$335,604				$309,795
Non-interest income		116,570				119,024				114,235				235,594				220,809
Total revenue		288,399				282,799				277,892				571,198				530,604
Investment securities gains (losses), net		(744		)		(995		)		2,143				(1,739		)		8,178
Provision for loan losses		9,216				9,439				6,757				18,655				11,177
Non-interest expense		177,089				177,473				165,463				354,562				329,308
Income before taxes		101,350				94,892				107,815				196,242				198,297
Income taxes		31,542				29,370				32,492				60,912				60,960
Non-controlling interest expense (income)		(85		)		148				970				63				1,929
Net income attributable to Commerce Bancshares, Inc.		69,893				65,374				74,353				135,267				135,408
Preferred stock dividends		2,250				2,250				2,250				4,500				4,500
Net income available to common shareholders		$67,643				$63,124				$72,103				$130,767				$130,908
Earnings per common share:
Net income — basic		$.70				$.65				$.72				$1.35				$1.30
Net income — diluted		$.70				$.65				$.72				$1.35				$1.30
Effective tax rate		31.10		%		31.00		%		30.41		%		31.05		%		31.04		%
Tax equivalent net interest income		$179,592				$171,425				$171,037				$351,017				$324,385
Average total interest earning assets (1)		$	23,252,289			$	23,332,333			$	22,586,879			$	23,292,311			$	22,549,223
Diluted wtd. average shares outstanding		95,630,629				95,782,109				99,437,469				95,706,370				99,899,840
RATIOS
Average loans to deposits (2)		63.45		%		62.81		%		60.75		%		63.13		%		60.24		%
Return on total average assets		1.15				1.07				1.26				1.11				1.15
Return on average common equity (3)		11.69				11.20				12.91				11.44				11.81
Non-interest income to total revenue		40.42				42.09				41.11				41.25				41.61
Efficiency ratio (4)		61.27				62.62				59.39				61.93				61.89
Net yield on interest earning assets		3.11				2.95				3.04				3.03				2.90
EQUITY SUMMARY
Cash dividends per common share		$.225				$.225				$.214				$.450				$.429
Cash dividends on common stock		$21,762				$21,760				$21,353				$43,522				$43,105
Cash dividends on preferred stock		$2,250				$2,250				$2,250				$4,500				$4,500
Book value per common share (5)		$24.67				$23.85				$22.15
Market value per common share (5)		$47.90				$44.95				$44.54
High market value per common share		$49.41				$45.96				$45.71
Low market value per common share		$42.98				$37.44				$39.55
Common shares outstanding (5)		96,560,828				96,537,955				97,999,567
Tangible common equity to tangible assets (6)		9.09		%		8.84		%		8.58		%
Tier I leverage ratio		9.36		%		9.11		%		9.08		%
OTHER QTD INFORMATION
Number of bank/ATM locations		346				346				349
Full-time equivalent employees		4,779				4,765				4,768

(1)		Excludes allowance for loan losses and unrealized gains/(losses) on available for sale securities.
(2)		Includes loans held for sale.
(3)		Annualized net income available to common shareholders divided by average total equity less preferred stock.
(4)		The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(5)		As of period end.
(6)		The tangible common equity ratio is calculated as stockholders' equity reduced by preferred stock, goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

COMMERCE BANCSHARES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
		For the Three Months Ended															For the Six Months Ended
(Unaudited) (In thousands, except per share data)		June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015			June 30, 2016			June 30, 2015
Interest income		$180,065			$172,128			$169,742			$169,115			$170,577			$352,193			$323,559
Interest expense		8,236			8,353			7,255			7,077			6,920			16,589			13,764
Net interest income		171,829			163,775			162,487			162,038			163,657			335,604			309,795
Provision for loan losses		9,216			9,439			9,186			8,364			6,757			18,655			11,177
Net interest income after provision for loan losses		162,613			154,336			153,301			153,674			156,900			316,949			298,618
NON-INTEREST INCOME
Bank card transaction fees		45,065			44,470			46,320			44,635			45,672			89,535			87,971
Trust fees		31,464			30,370			30,054			29,630			30,531			61,834			60,117
Deposit account charges and other fees		21,328			20,691			21,606			20,674			19,637			42,019			38,136
Capital market fees		2,500			2,725			3,116			2,620			2,738			5,225			5,740
Consumer brokerage services		3,491			3,509			3,254			3,687			3,507			7,000			6,843
Loan fees and sales		3,196			2,510			2,101			1,855			2,183			5,706			4,272
Other		9,526			14,749			9,591			8,187			9,967			24,275			17,730
Total non-interest income		116,570			119,024			116,042			111,288			114,235			235,594			220,809
INVESTMENT SECURITIES GAINS (LOSSES), NET		(744	)		(995	)		(1,480	)		(378	)		2,143			(1,739	)		8,178
NON-INTEREST EXPENSE
Salaries and employee benefits		104,808			106,859			102,098			100,874			99,655			211,667			197,729
Net occupancy		11,092			11,303			10,981			11,247			10,999			22,395			22,560
Equipment		4,781			4,634			4,915			4,789			4,679			9,415			9,382
Supplies and communication		5,693			6,829			6,554			5,609			5,226			12,522			10,807
Data processing and software		22,770			22,899			22,274			21,119			21,045			45,669			40,551
Marketing		4,389			3,813			3,539			4,343			4,307			8,202			8,225
Deposit insurance		3,143			3,165			3,145			2,981			3,019			6,308			6,020
Other		20,413			17,971			22,271			20,440			16,533			38,384			34,034
Total non-interest expense		177,089			177,473			175,777			171,402			165,463			354,562			329,308
Income before income taxes		101,350			94,892			92,086			93,182			107,815			196,242			198,297
Less income taxes		31,542			29,370			27,661			27,969			32,492			60,912			60,960
Net income		69,808			65,522			64,425			65,213			75,323			135,330			137,337
Less non-controlling interest expense (income)		(85	)		148			715			601			970			63			1,929
Net income attributable to Commerce Bancshares, Inc.		69,893			65,374			63,710			64,612			74,353			135,267			135,408
Less preferred stock dividends		2,250			2,250			2,250			2,250			2,250			4,500			4,500
Net income available to common shareholders		$67,643			$63,124			$61,460			$62,362			$72,103			$130,767			$130,908
Net income per common share — basic		$.70			$.65			$.63			$.63			$.72			$1.35			$1.30
Net income per common share — diluted		$.70			$.65			$.63			$.63			$.72			$1.35			$1.30
OTHER INFORMATION
Return on total average assets		1.15	%		1.07	%		1.05	%		1.09	%		1.26	%		1.11	%		1.15	%
Return on average common equity (1)		11.69			11.20			10.88			11.25			12.91			11.44			11.81
Efficiency ratio (2)		61.27			62.62			62.97			62.55			59.39			61.93			61.89
Effective tax rate		31.10			31.00			30.27			30.21			30.41			31.05			31.04
Net yield on interest earning assets		3.11			2.95			2.94			3.00			3.04			3.03			2.90
Tax equivalent net interest income		$179,592			$171,425			$170,141			$169,512			$171,037			$351,017			$324,385

(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, 2016				March 31, 2016				June 30, 2015
ASSETS
Loans
Business		$	4,840,248			$	4,575,081			$	4,267,997
Real estate — construction and land		819,896				745,369				448,887
Real estate — business		2,399,271				2,395,933				2,276,231
Real estate — personal		1,927,340				1,903,969				1,901,671
Consumer		1,939,486				1,904,320				1,848,457
Revolving home equity		408,301				423,005				430,880
Consumer credit card		753,166				744,364				750,731
Overdrafts		4,180				5,829				3,627
Total loans		13,091,888				12,697,870				11,928,481
Allowance for loan losses		(153,832		)		(152,132		)		(151,532		)
Net loans		12,938,056				12,545,738				11,776,949
Loans held for sale		33,254				60,078				7,852
Investment securities:
Available for sale		9,221,346				9,552,179				9,221,821
Trading		30,512				23,130				18,971
Non-marketable		111,931				117,259				108,346
Total investment securities		9,363,789				9,692,568				9,349,138
Federal funds sold and short-term securities purchased under agreements to resell		13,725				9,075				26,875
Long-term securities purchased under agreements to resell		825,000				825,000				1,050,000
Interest earning deposits with banks		183,223				171,651				264,683
Cash and due from banks		428,300				375,481				409,791
Land, buildings and equipment — net		342,237				350,423				353,366
Goodwill		138,921				138,921				138,921
Other intangible assets — net		6,561				6,539				6,978
Other assets		436,627				331,478				321,382
Total assets		$	24,709,693			$	24,506,952			$	23,705,935
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing		$	6,906,265			$	7,065,066			$	6,886,509
Savings, interest checking and money market		10,978,734				11,205,357				10,369,031
Time open and C.D.'s of less than $100,000		749,160				766,810				833,161
Time open and C.D.'s of $100,000 and over		1,515,888				1,649,076				1,200,008
Total deposits		20,150,047				20,686,309				19,288,709
Federal funds purchased and securities sold under agreements to repurchase		1,632,272				957,388				1,666,043
Other borrowings		103,878				103,806				103,843
Other liabilities		296,675				312,167				331,980
Total liabilities		22,182,872				22,059,670				21,390,575
Stockholders' equity:
Preferred stock		144,784				144,784				144,784
Common stock		489,862				489,862				484,155
Capital surplus		1,333,995				1,332,429				1,261,307
Retained earnings		470,558				424,677				514,451
Treasury stock		(51,707		)		(52,653		)		(143,565		)
Accumulated other comprehensive income		134,424				102,929				48,789
Total stockholders' equity		2,521,916				2,442,028				2,309,921
Non-controlling interest		4,905				5,254				5,439
Total equity		2,526,821				2,447,282				2,315,360
Total liabilities and equity		$	24,709,693			$	24,506,952			$	23,705,935

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE BALANCE SHEETS
(Unaudited) (Dollars in thousands)		For the Three Months Ended
		June 30, 2016				March 31, 2016				December 31, 2015				September 30, 2015				June 30, 2015
ASSETS:
Loans:
Business		$	4,691,476			$	4,491,556			$	4,351,756			$	4,221,478			$	4,135,362
Real estate — construction and land		789,329				682,557				584,185				476,331				432,008
Real estate — business		2,389,170				2,382,094				2,320,439				2,284,928				2,287,885
Real estate — personal		1,905,968				1,909,532				1,916,219				1,911,469				1,891,109
Consumer		1,927,925				1,934,577				1,908,540				1,861,636				1,815,699
Revolving home equity		413,198				429,682				429,582				434,355				429,644
Consumer credit card		738,130				752,098				756,743				746,066				734,289
Overdrafts		3,916				4,772				6,303				5,233				4,510
Total loans		12,859,112				12,586,868				12,273,767				11,941,496				11,730,506
Allowance for loan losses		(151,622		)		(151,308		)		(150,856		)		(150,890		)		(152,994		)
Net loans		12,707,490				12,435,560				12,122,911				11,790,606				11,577,512
Loans held for sale		56,272				9,360				6,118				4,471				3,969
Investment securities:
U.S. government and federal agency obligations		698,374				703,212				580,816				402,591				424,823
Government-sponsored enterprise obligations		666,354				776,488				824,066				887,631				988,120
State and municipal obligations		1,763,849				1,718,587				1,779,704				1,805,931				1,799,355
Mortgage-backed securities		3,394,466				3,424,716				3,335,627				3,217,589				3,161,050
Asset-backed securities		2,377,708				2,537,472				2,574,426				2,546,982				2,839,483
Other marketable securities		337,572				342,382				337,340				302,323				249,075
Unrealized gain on investment securities		191,565				149,319				130,231				118,404				170,039
Total available for sale securities		9,429,888				9,652,176				9,562,210				9,281,451				9,631,945
Trading securities		20,540				18,190				23,217				22,283				19,758
Non-marketable securities		116,103				127,769				114,321				114,062				109,522
Total investment securities		9,566,531				9,798,135				9,699,748				9,417,796				9,761,225
Federal funds sold and short-term securities purchased under agreements to    resell		11,916				17,378				18,694				21,012				12,812
Long-term securities purchased under agreements to resell		824,999				850,275				902,174				1,007,606				1,049,999
Interest earning deposits with banks		125,024				219,636				178,486				160,687				198,407
Other assets		1,113,214				1,172,916				1,119,602				1,106,739				1,135,601
Total assets		$	24,405,446			$	24,503,260			$	24,047,733			$	23,508,917			$	23,739,525
LIABILITIES AND EQUITY:
Non-interest bearing deposits		$	6,885,889			$	6,905,673			$	6,995,666			$	6,781,592			$	6,744,536
Savings		787,478				761,020				736,824				739,172				738,769
Interest checking and money market		10,287,923				10,128,543				9,805,457				9,619,621				9,759,608
Time open & C.D.'s of less than $100,000		758,703				775,221				796,639				820,792				844,675
Time open & C.D.'s of $100,000 and over		1,635,892				1,483,700				1,219,803				1,171,617				1,227,322
Total deposits		20,355,885				20,054,157				19,554,389				19,132,794				19,314,910
Borrowings:
Federal funds purchased and securities sold under agreements to   repurchase		1,211,892				1,404,754				1,707,430				1,677,322				1,674,682
Other borrowings		104,649				377,711				103,819				103,875				103,846
Total borrowings		1,316,541				1,782,465				1,811,249				1,781,197				1,778,528
Other liabilities		260,179				254,437				295,718				250,626				260,945
Total liabilities		21,932,605				22,091,059				21,661,356				21,164,617				21,354,383
Equity		2,472,841				2,412,201				2,386,377				2,344,300				2,385,142
Total liabilities and equity		$	24,405,446			$	24,503,260			$	24,047,733			$	23,508,917			$	23,739,525

COMMERCE BANCSHARES, INC. and SUBSIDIARIES AVERAGE RATES
(Unaudited) (Dollars in thousands)		For the Three Months Ended
		June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015
ASSETS:
Loans:
Business (1)		2.90	%		2.87	%		2.78	%		2.73	%		2.79	%
Real estate — construction and land		3.46			3.51			3.41			3.52			3.65
Real estate — business		3.69			3.70			3.68			3.71			3.83
Real estate — personal		3.76			3.77			3.76			3.73			3.77
Consumer		3.80			3.87			3.91			4.00			3.92
Revolving home equity		3.59			3.52			3.44			3.50			3.60
Consumer credit card		11.54			11.42			11.23			11.59			11.74
Overdrafts		—			—			—			—			—
Total loans		3.86			3.89			3.85			3.89			3.95
Loans held for sale		4.95			5.80			5.40			4.26			3.94
Investment securities:
U.S. government and federal agency obligations		3.48			.40			.17			4.39			6.09
Government-sponsored enterprise obligations		3.03			1.93			1.89			1.77			1.82
State and municipal obligations (1)		3.60			3.66			3.64			3.44			3.49
Mortgage-backed securities		2.36			2.45			2.54			2.47			2.61
Asset-backed securities		1.45			1.39			1.25			1.15			1.03
Other marketable securities (1)		2.77			2.79			2.83			2.65			2.61
Total available for sale securities		2.51			2.20			2.20			2.32			2.38
Trading securities (1)		2.27			2.87			2.65			2.72			2.86
Non-marketable securities (1)		8.03			6.54			8.19			8.28			8.90
Total investment securities		2.58			2.26			2.27			2.39			2.45
Federal funds sold and short-term securities purchased under    agreements to resell		.64			.56			.32			.40			.47
Long-term securities purchased under agreements to resell		1.64			1.64			1.40			1.29			1.40
Interest earning deposits with banks		.49			.49			.28			.25			.25
Total interest earning assets		3.25			3.10			3.07			3.12			3.16
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings		.11			.12			.12			.13			.11
Interest checking and money market		.13			.13			.13			.13			.13
Time open & C.D.'s of less than $100,000		.38			.38			.37			.38			.39
Time open & C.D.'s of $100,000 and over		.58			.54			.51			.53			.49
Total interest bearing deposits		.20			.19			.18			.18			.18
Borrowings:
Federal funds purchased and securities sold under agreements to   repurchase		.24			.25			.14			.11			.10
Other borrowings		3.49			1.33			3.47			3.43			3.44
Total borrowings		.50			.48			.33			.31			.30
Total interest bearing liabilities		.22	%		.23	%		.20	%		.20	%		.19	%
Net yield on interest earning assets		3.11	%		2.95	%		2.94	%		3.00	%		3.04	%

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

COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CREDIT QUALITY
		For the Three Months Ended																				For the Six Months Ended
(Unaudited) (In thousands, except per share data)		June 30, 2016				March 31, 2016				December 31, 2015				September 30, 2015				June 30, 2015				June 30, 2016				June 30, 2015
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period		$	152,132			$	151,532			$	151,532			$	151,532			$	153,532			$	151,532			$	156,532
Provision for losses		9,216				9,439				9,186				8,364				6,757				18,655				11,177
Net charge-offs (recoveries):
Commercial portfolio:
Business		(65		)		463				(133		)		(175		)		(239		)		398				(80		)
Real estate — construction and land		(507		)		(11		)		60				(67		)		(309		)		(518		)		(1,255		)
Real estate — business		(1,030		)		(242		)		(626		)		(22		)		764				(1,272		)		515
		(1,602		)		210				(699		)		(264		)		216				(1,392		)		(820		)
Personal banking portfolio:
Consumer credit card		6,650				5,918				6,479				5,784				6,424				12,568				12,776
Consumer		1,781				2,599				2,251				2,435				1,849				4,380				3,592
Overdraft		307				219				487				429				212				526				434
Real estate — personal		305				(195		)		458				(69		)		(47		)		110				52
Revolving home equity		75				88				210				49				103				163				143
		9,118				8,629				9,885				8,628				8,541				17,747				16,997
Total net loan charge-offs		7,516				8,839				9,186				8,364				8,757				16,355				16,177
Balance at end of period		$	153,832			$	152,132			$	151,532			$	151,532			$	151,532			$	153,832			$	151,532
NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business		(.01		)%		.04		%		(.01		)%		(.02		)%		(.02		)%		.02		%		—		%
Real estate — construction and land		(.26		)		(.01		)		.04				(.06		)		(.29		)		(.14		)		(.60		)
Real estate — business		(.17		)		(.04		)		(.11		)		—				.13				(.11		)		.05
		(.08		)		.01				(.04		)		(.01		)		.01				(.04		)		(.02		)
Personal banking portfolio:
Consumer credit card		3.62				3.16				3.40				3.08				3.51				3.39				3.47
Consumer		.37				.54				.47				.52				.41				.46				.41
Overdraft		31.53				18.46				30.65				32.52				18.85				24.35				17.30
Real estate — personal		.06				(.04		)		.09				(.01		)		(.01		)		.01				.01
Revolving home equity		.07				.08				.19				.04				.10				.08				.07
		.74				.69				.78				.69				.70				.71				.71
Total		.24		%		.28		%		.30		%		.28		%		.30		%		.26		%		.28		%
CREDIT QUALITY RATIOS
Non-performing assets to total loans		.20		%		.25		%		.24		%		.24		%		.26		%
Non-performing assets to total assets		.11				.13				.12				.12				.13
Allowance for loan losses to total loans		1.18				1.20				1.22				1.24				1.27
NON-PERFORMING ASSETS
Non-accrual loans:
Business		$	12,716			$	16,098			$	10,874			$	11,699			$	11,856
Real estate — construction and land		2,170				2,710				3,090				4,046				3,600
Real estate — business		5,236				6,234				7,863				5,054				5,643
Real estate — personal		4,293				4,205				4,425				4,980				5,446
Consumer		—				—				—				—				100
Revolving home equity		109				120				323				—				—
Total		24,524				29,367				26,575				25,779				26,645
Foreclosed real estate		1,609				1,997				2,819				3,053				4,185
Total non-performing assets		$	26,133			$	31,364			$	29,394			$	28,832			$	30,830
Loans past due 90 days and still accruing interest		$	15,892			$	15,360			$	16,467			$	14,707			$	14,218
*as a percentage of average loans (excluding loans held for sale)

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2016

For the quarter ended June 30, 2016, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $69.9 million, compared to $65.4 million in the previous quarter and $74.4 million in the same quarter last year. The increase in net income over the previous quarter resulted mainly from an increase in net interest income of $8.1 million coupled with small declines in the provision for loan losses and non-interest expense. Non-interest income declined $2.5 million mainly due to a gain on sale of a former branch property in the prior quarter of $3.3 million. For the current quarter, the return on total average assets was 1.15%, the return on average common equity was 11.7%, and the efficiency ratio was 61.3%.

Balance Sheet Review

During the 2^nd quarter of 2016, average total loans increased $319.2 million, or 10% annualized, compared to the previous quarter and increased $1.2 billion, or 10.1%, compared to the same period last year. Compared to the previous quarter, the increase in average loans resulted mainly from growth in business (up $199.9 million) and construction loans (up $106.8 million). The increase in business loans came from continued growth in commercial and industrial, leasing and tax-free lending activities, while commercial construction projects continued to drive growth in construction loans. Average consumer loans, including held for sale auto loans, increased by $36.6 million as a result of growth mainly in private banking, motorcycle and automobile lending. Average personal real estate loans declined slightly this quarter; however, the Company sold certain fixed rate loans totaling $18.2 million during the quarter, as part of an origination initiative that began in 2015. In March 2016, the Company identified certain automobile loans totaling $50.4 million which were reclassified as held for sale. As of June 30, 2016, loans totaling $21.8 million had been sold and the remaining loans, totaling $20.8 million, continue to be offered for sale.

During the 2^nd quarter of 2016, total average available for sale investment securities at fair value declined $222.3 million to $9.4 billion. Purchases of new securities totaled $193.2 million in the 2^nd quarter of 2016 and were offset by sales, maturities and pay downs of $569.3 million. Government-sponsored agency securities decreased on average by $110.1 million, while average mortgage-backed and asset-backed securities declined $190.0 million. At June 30, 2016, the duration of the investment portfolio was 2.6 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total average deposits increased $301.7 million, or 1.5%, this quarter compared to the previous quarter. The increase in average deposits resulted mainly from increases in money market (increase of $143.7 million), savings (increase of $26.5 million), and jumbo certificate of deposit (increase of $152.2 million) accounts. Personal demand deposits increased $34.3 million, while business demand deposits declined $51.0 million this quarter. Compared to the previous quarter, total average consumer and commercial deposits increased $194.6 million and $155.2 million, respectively, while private banking deposits decreased $44.9 million. The average loans to deposits ratio was 63.5% in the current quarter and 62.8% in the prior quarter.

Compared to the previous quarter, the Company's average borrowings declined $465.9 million to $1.3 billion in the current quarter, as a result of a decline of $234.4 million in repurchase agreements and a reduction in short-term FHLB debt of $272.7 million.

Net Interest Income

Net interest income (tax equivalent) in the 2^nd quarter of 2016 amounted to $179.6 million compared with $171.4 million in the previous quarter, an increase of $8.2 million. Net interest income (tax equivalent) for the current quarter also increased $8.6 million compared to the 2^nd quarter of last year. During the 2^nd quarter of 2016, the net yield on earning assets (tax equivalent) was 3.11%, compared with 2.95% in the previous quarter and 3.04% in the same period last year.

The increase in net interest income (tax equivalent) in the current quarter compared to the prior quarter was due mainly to an increase in interest on investment securities of $5.8 million, growth in interest earned on loans, and a slight decline in interest expense. The higher interest on investment securities was mainly due to an increase in inflation income on treasury inflation-protected securities (TIPS) of $5.2 million coupled with increased earnings on government-sponsored agency securities of $1.6 million, as a result of early maturity calls on certain securities. Total inflation income for the quarter on TIPS totaled $3.7 million, compared to negative $1.5 million in the prior quarter. The yield on investment securities totaled 2.58% in the current quarter compared to 2.26% in the prior quarter.

Excluding the effects of inflation income and added earnings on government-sponsored agency securities noted above, the net yield on earning assets would have been 3.01% in the current quarter, 2.98% in the prior quarter, and 2.95% in the same period last year. During the current quarter, adjustments to premium amortization expense on mortgage-backed and asset-backed securities, due to changes in prepayment speed assumptions, were not significant.

Compared to the previous quarter, interest income (tax-equivalent) on loans increased $1.9 million mainly due to higher average balances of business and construction loans and higher rates on business loans. However, these increases in interest income were partly offset by lower yields on consumer banking loans. Overall, the average yield on the loan portfolio decreased 3 basis points this quarter to 3.86%.

Interest expense on deposits increased $392 thousand this quarter compared with the previous quarter due to higher rates and balances on jumbo certificates of deposit. Borrowing costs declined $509 thousand due to a reduction in the balance of short-term average FHLB debt and repurchase agreements.

Non-Interest Income

In the 2^nd quarter of 2016, total non-interest income amounted to $116.6 million, an increase of $2.3 million, or 2.0%, compared to the same period last year. Also, current quarter non-interest income decreased $2.5 million, or 2.1%, when compared to amounts recorded in the previous quarter, mainly due to the sale of the branch property mentioned above. The increase in non-interest income over the same period last year was due to growth in deposit, trust, sweep, and loan fees, partly offset by lower bank card, lease, capital market fees, swap and tax credit fee income.

Total bank card fees in the current quarter decreased $607 thousand, or 1.3%, from the same period last year. The decrease was mainly the result of a decline in commercial card fees of $1.2 million, or 5.4%, but was offset by growth in debit and credit card interchange fees of 3.0% and 3.4%, respectively. Total bank card fees this quarter were comprised of fees on corporate card ($21.8 million), debit card ($10.0 million), merchant ($6.9 million) and credit card ($6.3 million) transactions.

In the current quarter, trust fees increased $933 thousand, or 3.1%, compared to the same period last year, resulting from continued growth in private client, institutional, and corporate trust activities. Deposit account fees also increased $1.7 million, or 8.6%, compared to the same period last year as a result of 4.7% growth in corporate cash management fees coupled with higher deposit account service fees, which grew $1.3 million, or 36.0%.

Capital market fees decreased $238 thousand, or 8.7%, from the same quarter last year on lower sales volumes, while loan fees and sales grew by $1.0 million due to higher mortgage banking revenue from sales of newly-originated fixed rate residential mortgages. Included in other non-interest income are sweep fees, which increased $443 thousand in the current quarter over the same quarter last year, and fees from sales of interest rate swaps and sales of tax credits, which declined by $956 thousand and $280 thousand, respectively. Non-interest income comprised 40.4% of the Company's total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities losses of $744 thousand this quarter, compared with net losses of $995 thousand last quarter and net gains of $2.1 million in the same period last year. Losses in the current quarter mainly resulted from unrealized fair value adjustments to the Company's private equity investment portfolio.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $177.1 million, a slight decrease from the previous quarter and was $11.6 million, or 7.0%, higher than the same period last year. The increase over the same period in the previous year was mainly due to higher costs for salaries and benefits, supplies and communication, data processing costs, and bank card rewards expense. Also, in the 2^nd quarter of 2015, a recovery on a letter of credit exposure was recorded totaling $2.8 million that did not re-occur in 2016.

Compared to the 2^nd quarter of last year, salaries and benefits expense increased $5.2 million. Growth in salaries expense of $3.8 million, or 4.4%, was mainly due to higher full-time salaries and incentive compensation costs. Benefits expense increased $1.4 million, or 9.8%, mostly due to higher medical costs. Growth in salaries expense compared to the previous year resulted mainly from higher staffing costs in commercial card, residential mortgage, trust, information technology and other support units. Full-time equivalent employees totaled 4,779 and 4,765 at June 30, 2016 and 2015, respectively.

Compared to the 2^nd quarter of last year, occupancy, marketing and equipment costs grew by .8%, 1.9% and 2.2%, respectively, while costs for supplies and communication increased $467 thousand, or 8.9%, on higher costs related to reissuance of EMV chip cards and increased data network expenses. Data processing costs increased $1.7 million this quarter, mainly due to higher bank card processing costs, software expense and fees paid to outsourced data service providers. Bank card rewards expense (included in other expense) grew by $1.4 million this quarter compared to the 2^nd quarter of last year; however, part of this growth was due to reductions of $923 thousand in rewards expense estimates during the second quarter of last year that did not reoccur in the current quarter. Operating losses totaled $1.4 million this quarter compared to $2.2 million in the 2^nd quarter of 2015, mainly due to lower bank card related fraud losses, partly offset by a $700 thousand operating loss accrual this quarter.

Income Taxes

The effective tax rate for the Company was 31.1% in the current quarter, compared to 31.0% in the previous quarter and 30.4% in the 2^nd quarter of 2015.

Credit Quality

Net loan charge-offs in the 2^nd quarter of 2016 amounted to $7.5 million, compared with $8.8 million in both the prior quarter and in the 2^nd quarter of last year. The ratio of annualized net loan charge-offs to total average loans was .24% in the current quarter compared to .28% in the previous quarter and .30% in the 2^nd quarter of last year.

In the 2^nd quarter of 2016, annualized net loan charge-offs on average consumer credit card loans were 3.62%, compared with 3.16% in the previous quarter and 3.51% in the same period last year. Consumer loan net charge-offs were .37% of average consumer loans in the current quarter, .54% in the prior quarter and .41% in the same quarter last year. The provision for loan losses in the current quarter totaled $9.2 million, compared to $9.4 million in the prior quarter and $6.8 million in the 2^nd quarter of last year. This quarter, the provision for loan losses exceeded net loan charge-offs by $1.7 million. At June 30, 2016, the allowance totaled $153.8 million, which was 1.18% of total loans and 627% of total non-accrual loans.

At June 30, 2016, total non-performing assets amounted to $26.1 million, a decrease of $5.2 million from the previous quarter. Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($24.5 million and $1.6 million, respectively, at June 30, 2016). At June 30, 2016, the balance of non-accrual loans, which represented .19% of loans outstanding, included business loans of $12.7 million, business real estate loans of $5.2 million, personal real estate loans of $4.3 million and construction and land loans of $2.2 million. Loans more than 90 days past due and still accruing interest totaled $15.9 million at June 30, 2016.

Other

During the 2^nd quarter of 2016, the Company paid a cash dividend of $.225 per common share, representing an increase of 5% over the rate paid in 2015. Also, a cash dividend of $2.3 million was paid on its preferred stock. Additionally, the Company purchased 21,769 shares of treasury stock this quarter at an average price of $47.33.

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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