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8-K - 8-K - COMMERCE BANCSHARES INC /MO/cbsh123120128k.htm


Exhibit 99.1
                               CBSH
                   1000 Walnut Street / Post Office Box 419248 / Kansas City, Missouri 64151-6248 / 816.234.2000
                                                                 
FOR IMMEDIATE RELEASE:
Tuesday, January 15, 2013


COMMERCE BANCSHARES, INC. ANNOUNCES FOURTH
QUARTER EARNINGS PER SHARE GROWTH OF 9%

Commerce Bancshares, Inc. announced earnings of $.72 per share for the three months ended December 31, 2012 compared to $.66 per share in the fourth quarter of 2011, or an increase of 9.1%. Net income for the fourth quarter amounted to $66.8 million, compared to $61.5 million in the same quarter last year and $66.0 million in the prior quarter. For the quarter, the return on average assets totaled 1.25%, the return on average equity was 11.6% and the efficiency ratio was 59.6%.

For the year ended December 31, 2012, earnings per share totaled $2.90 compared to $2.69 in 2011, or an increase of 7.8%. Net income amounted to $269.3 million in 2012 compared to $256.3 million for the same period last year, or an increase of $13.0 million. In 2012, the return on average assets was 1.30%, the return on average equity was 12.0% and the efficiency ratio was 59.3%.
    
In making this announcement, David W. Kemper, Chairman and CEO, said, “We were pleased to report record earnings in 2012 of over $269 million, which represents an increase of 5%. Current quarter results compared to the previous quarter reflected growth in net interest income, low credit costs and solid growth in both trust and bankcard fees. Strong growth in deposits coupled with continued new loan volumes and higher interest on inflation-protected securities enabled our net interest income to increase this quarter. Non-interest income increased $2.4 million this quarter compared to the previous quarter, and was up 10% compared to last year as a result of growth in commercial card fees of 25% and double digit growth in credit card and trust fee income. Expense growth this quarter was mainly centered in salaries and technology costs where we continued to make investments in our fee businesses. Average loans grew $174.5 million, or 2%, this quarter over the previous quarter from growth in both consumer and commercial lending activities while average deposits increased $720.7 million, or 4%. Record earnings over the last two years have strengthened our capital and liquidity and allowed us to pay a special dividend in December of $1.50 per share in advance of the higher tax rates now in effect.”

Further, Mr. Kemper noted, “Net loan charge-offs for the current quarter totaled $10.8 million, compared to $15.6 million in the fourth quarter of 2011 and $9.1 million in the previous quarter. Commercial net loan charge-offs increased $2.0 million this quarter compared to the previous quarter while consumer loan losses declined by 3% and totaled $8.8 million. During the current quarter, the provision for loan losses totaled $8.3 million, or $2.5 million less than net loan charge-offs, reflecting improved credit trends even as loan balances increased. Our allowance for loan losses amounted to $172.5 million this quarter, representing 3.4 times our non-performing loans. Total non-performing assets also decreased $8.6 million from the previous quarter to $64.9 million this quarter.”
        
(more)





 


Total assets at December 31, 2012 were $22.2 billion, total loans were $9.8 billion, and total deposits were $18.3 billion. During the quarter, the Company issued a 5% stock dividend and paid both a regular cash dividend of $.23 per share and a special cash dividend of $1.50 per share. The Company also repurchased approximately 774,000 shares of its common stock at an average price per share of $37.93 (per share price of $36.12 as adjusted 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 in approximately 360 locations in Missouri, Illinois, Kansas, Oklahoma and Colorado. The Company also has operating subsidiaries involved in mortgage banking, credit related insurance, and private equity activities.

Summary of Non-Performing Assets and Past Due Loans
(Dollars in thousands)
 
9/30/2012
 
12/31/2012
 
12/31/2011
Non-Accrual Loans
 
$
55,201

 
$
51,410

 
$
75,482

Foreclosed Real Estate
 
$
18,234

 
$
13,453

 
$
18,321

Total Non-Performing Assets
 
$
73,435

 
$
64,863


$
93,803

Non-Performing Assets to Loans
 
.76
%
 
.66
%
 
1.02
%
Non-Performing Assets to Total Assets
 
.35
%
 
.29
%
 
.45
%
Loans 90 Days & Over Past Due — Still Accruing
 
$
12,232

 
$
15,347

 
$
14,958

   
This financial news release, including management's discussion of fourth quarter results, is posted to the Company's web site at www.commercebank.com.
* * * * * * * * * * * * * * *
For additional information, contact
Jeffery Aberdeen, Controller
at PO Box 419248, Kansas City, MO
or by telephone at (816) 234-2081
Web Site: http://www.commercebank.com
Email: mymoney@commercebank.com








2



COMMERCE BANCSHARES, INC. and SUBSIDIARIES
FINANCIAL HIGHLIGHTS
 
 
For the Three Months Ended
For the Year Ended
(Unaudited)
 
September 30,
2012
December 31,
2012
December 31,
2011
December 31,
2012
December 31,
2011
FINANCIAL SUMMARY (In thousands, except per share data)
 
 
Net interest income
 

$153,811


$161,253


$161,757


$639,906


$646,070

Taxable equivalent net interest income
 
159,934

168,428

167,940

665,214

669,515

Non-interest income
 
100,922

103,309

94,035

399,630

392,917

Investment securities gains (losses), net
 
3,180

(3,728
)
4,942

4,828

10,812

Provision for loan losses
 
5,581

8,326

12,143

27,287

51,515

Non-interest expense
 
153,391

158,277

156,030

618,469

617,249

Net income attributable to Commerce Bancshares, Inc.
 
66,006

66,791

61,504

269,329

256,343

Cash dividends
 
20,165

150,789

19,504

211,608

79,140

Net total loan charge-offs (recoveries)
 
9,082

10,826

15,649

39,287

64,521

Business
 
202

791

650

(2,497
)
4,988

Real estate — construction and land
 
(102
)
(517
)
2,624

(283
)
6,950

Real estate — business
 
(25
)
1,799

731

5,108

3,563

Consumer credit card
 
6,277

6,095

6,986

24,475

31,617

Consumer
 
1,791

1,731

2,682

8,127

12,156

Revolving home equity
 
314

187

884

1,804

1,667

Real estate — personal
 
267

411

798

1,426

2,772

Overdraft
 
358

329

294

1,127

808

Per common share:
 
 
 
 
 
 
Net income — basic
 

$.71


$.73


$.66


$2.91


$2.70

Net income — diluted
 

$.72


$.72


$.66


$2.90


$2.69

Cash dividends
 

$.219


$1.648


$.209


$2.305


$.834

Diluted wtd. average shares o/s
 
91,552

90,999

93,086

91,894

94,712

RATIOS
 
 
 
 
 
 
Average loans to deposits (1)
 
56.89
%
55.53
%
56.01
%
55.80
%
59.15
%
Return on total average assets
 
1.28
%
1.25
%
1.19
%
1.30
%
1.32
%
Return on total average equity
 
11.57
%
11.62
%
11.39
%
12.00
%
12.15
%
Non-interest income to revenue (2)
 
39.62
%
39.05
%
36.76
%
38.44
%
37.82
%
Efficiency ratio (3)
 
59.99
%
59.62
%
60.71
%
59.26
%
59.10
%
AT PERIOD END
 
 
 
 
 
 
Book value per share based on total equity
 

$25.08


$23.76


$23.24

 
 
Market value per share
 

$38.41


$35.06


$36.30

 
 
Allowance for loan losses as a percentage of loans
 
1.82
%
1.75
%
2.01
%
 
 
Tier I leverage ratio
 
10.00
%
9.14
%
9.55
%
 
 
Tangible common equity to assets ratio (4)
 
10.47
%
9.25
%
9.91
%
 
 
Common shares outstanding
 
91,988,811

91,414,306

93,399,774

 
 
Shareholders of record
 
4,146

4,135

4,218

 
 
Number of bank/ATM locations
 
362

362

363

 
 
Full-time equivalent employees
 
4,707

4,708

4,745

 
 
OTHER QTD INFORMATION
 
 
 
 
 
 
High market value per share
 

$40.70


$38.70


$36.83

 
 
Low market value per share
 

$35.91


$34.69


$29.99

 
 
(1)
Includes loans held for sale.
(2)
Revenue includes net interest income and non-interest income.
(3)
The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4)
The tangible common equity ratio is calculated as stockholders’ equity reduced by goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

3



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)
 
September 30,
2012
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
Interest income
 

$163,194

 

$170,185

 

$173,223

 

$677,969

 

$697,971

Interest expense
 
9,383

 
8,932

 
11,466

 
38,063

 
51,901

Net interest income
 
153,811

 
161,253

 
161,757

 
639,906

 
646,070

Provision for loan losses
 
5,581

 
8,326

 
12,143

 
27,287

 
51,515

Net interest income after provision for loan losses
 
148,230

 
152,927

 
149,614

 
612,619

 
594,555

NON-INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Bank card transaction fees
 
39,488

 
41,542

 
36,162

 
154,197

 
157,077

Trust fees
 
23,681

 
24,351

 
22,095

 
94,679

 
88,313

Deposit account charges and other fees
 
19,873

 
20,301

 
20,623

 
79,485

 
82,651

Capital market fees
 
5,110

 
4,075

 
4,591

 
21,066

 
19,846

Consumer brokerage services
 
2,441

 
2,619

 
2,142

 
10,162

 
10,018

Loan fees and sales
 
1,358

 
1,412

 
1,647

 
6,037

 
7,580

Other
 
8,971

 
9,009

 
6,775

 
34,004

 
27,432

Total non-interest income
 
100,922

 
103,309

 
94,035

 
399,630

 
392,917

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
 
 
 
 
 
 
 
 
Impairment (losses) reversals on debt securities
 
5,989

 
(356
)
 
(796
)
 
11,223

 
2,190

Noncredit-related losses (reversals) on securities not expected to be sold
 
(6,546
)
 
93

 
14

 
(12,713
)
 
(4,727
)
Net impairment losses
 
(557
)
 
(263
)
 
(782
)
 
(1,490
)
 
(2,537
)
Realized gains (losses) on sales and fair value adjustments
 
3,737

 
(3,465
)
 
5,724

 
6,318

 
13,349

Investment securities gains (losses), net
 
3,180

 
(3,728
)
 
4,942

 
4,828

 
10,812

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
89,292

 
94,553

 
88,010

 
360,899

 
345,325

Net occupancy
 
11,588

 
11,581

 
11,674

 
45,534

 
46,434

Equipment
 
4,976

 
4,983

 
5,583

 
20,147

 
22,252

Supplies and communication
 
5,400

 
5,641

 
5,550

 
22,321

 
22,448

Data processing and software
 
19,279

 
18,768

 
17,873

 
73,798

 
68,103

Marketing
 
4,100

 
2,715

 
3,469

 
15,106

 
16,767

Deposit insurance
 
2,608

 
2,692

 
2,680

 
10,438

 
13,123

Debit overdraft litigation
 

 

 
7,400

 

 
18,300

Other
 
16,148

 
17,344

 
13,791

 
70,226

 
64,497

Total non-interest expense
 
153,391

 
158,277

 
156,030

 
618,469

 
617,249

Income before income taxes
 
98,941

 
94,231

 
92,561

 
398,608

 
381,035

Less income taxes
 
32,155

 
27,628

 
29,514

 
127,169

 
121,412

Net income
 
66,786

 
66,603

 
63,047

 
271,439

 
259,623

Less non-controlling interest expense (income)
 
780

 
(188
)
 
1,543

 
2,110

 
3,280

Net income attributable to Commerce Bancshares, Inc.
 

$66,006

 

$66,791

 

$61,504

 

$269,329

 

$256,343

Net income per common share — basic
 

$.71

 

$.73

 

$.66

 

$2.91

 

$2.70

Net income per common share — diluted
 

$.72

 

$.72

 

$.66

 

$2.90

 

$2.69


4



COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Unaudited)
(In thousands)
 
September 30,
2012
 
December 31,
2012
 
December 31,
2011
ASSETS
 
 
 
 
 
 
Loans
 

$9,638,645

 

$9,831,384

 

$9,177,478

Allowance for loan losses
 
(175,032
)
 
(172,532
)
 
(184,532
)
Net loans
 
9,463,613

 
9,658,852

 
8,992,946

Loans held for sale
 
8,741

 
8,827

 
31,076

Investment securities:
 
 
 
 
 
 
Available for sale
 
9,020,951

 
9,522,248

 
9,224,702

Trading
 
13,595

 
28,837

 
17,853

Non-marketable
 
117,540

 
118,650

 
115,832

Total investment securities
 
9,152,086

 
9,669,735

 
9,358,387

Short-term federal funds sold and securities purchased under agreements to resell
 
10,475

 
27,595

 
11,870

Long-term securities purchased under agreements to resell
 
850,000

 
1,200,000

 
850,000

Interest earning deposits with banks
 
132,144

 
179,164

 
39,853

Cash and due from banks
 
426,742

 
573,066

 
465,828

Land, buildings and equipment — net
 
350,040

 
357,612

 
360,146

Goodwill
 
125,585

 
125,585

 
125,585

Other intangible assets — net
 
5,804

 
5,300

 
7,714

Other assets
 
353,539

 
353,853

 
405,962

Total assets
 
$
20,878,769

 
$
22,159,589

 
$
20,649,367

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Non-interest bearing
 

$5,814,932

 

$6,299,903

 

$5,377,549

Savings, interest checking and money market
 
9,025,688

 
9,817,943

 
8,933,941

Time open and C.D.’s of less than $100,000
 
1,094,215

 
1,074,618

 
1,166,104

Time open and C.D.’s of $100,000 and over
 
914,795

 
1,156,189

 
1,322,289

Total deposits
 
16,849,630

 
18,348,653

 
16,799,883

Federal funds purchased and securities sold under agreements to repurchase
 
1,257,949

 
1,083,550

 
1,256,081

Other borrowings
 
103,744

 
103,710

 
111,817

Other liabilities
 
360,374

 
452,102

 
311,225

Total liabilities
 
18,571,697

 
19,988,015

 
18,479,006

Stockholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
446,387

 
458,646

 
446,387

Capital surplus
 
1,033,515

 
1,102,507

 
1,042,065

Retained earnings
 
717,138

 
477,210

 
575,419

Treasury stock
 
(60,644
)
 
(7,580
)
 
(8,362
)
Accumulated other comprehensive income
 
166,040

 
136,344

 
110,538

Total stockholders’ equity
 
2,302,436

 
2,167,127

 
2,166,047

Non-controlling interest
 
4,636

 
4,447

 
4,314

Total equity
 
2,307,072

 
2,171,574

 
2,170,361

Total liabilities and equity
 
$
20,878,769

 
$
22,159,589

 
$
20,649,367



5



COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
(Unaudited)
(Dollars in thousands)
For the Three Months Ended
September 30, 2012
 
December 31, 2012
 
December 31, 2011
 
Average Balance
 
Avg. Rates Earned/Paid
 
Average Balance
 
Avg. Rates Earned/Paid
 
Average Balance
 
Avg. Rates Earned/Paid
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Business (A)
$
3,018,475

 
3.39
%
 
$
3,041,700

 
3.29
%
 
$
2,819,598

 
3.53
%
Real estate — construction and land
339,908

 
4.30

 
345,608

 
4.11

 
386,738

 
4.52

Real estate — business
2,182,584

 
4.39

 
2,200,088

 
4.33

 
2,162,052

 
4.67

Real estate — personal
1,523,148

 
4.31

 
1,571,860

 
4.15

 
1,421,296

 
4.64

Consumer
1,205,318

 
5.54

 
1,272,831

 
5.35

 
1,111,299

 
6.08

Revolving home equity
444,076

 
4.17

 
436,671

 
4.13

 
464,694

 
4.24

Consumer credit card
730,104

 
11.83

 
748,754

 
11.42

 
733,712

 
11.62

Overdrafts
5,353

 

 
5,908

 

 
7,101

 

Total loans (B)
9,448,966

 
4.76

 
9,623,420

 
4.64

 
9,106,490

 
5.01

Loans held for sale
8,753

 
3.86

 
8,818

 
3.74

 
36,987

 
2.55

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
329,172

 
(.07
)
(C)
341,537

 
5.11

 
328,641

 
2.49

Government-sponsored enterprise obligations
276,505

 
1.65

 
400,387

 
1.72

 
305,003

 
1.93

State and municipal obligations (A)
1,387,624

 
3.89

 
1,531,754

 
3.67

 
1,239,330

 
4.16

Mortgage-backed securities
3,766,602

 
2.62

 
3,447,995

 
2.79

 
4,453,362

 
2.71

Asset-backed securities
2,878,941

 
1.10

 
3,157,988

 
.99

 
2,645,538

 
1.12

Other marketable securities (A)
121,596

 
4.50

 
138,066

 
5.35

 
164,545

 
5.39

Total available for sale securities (B)
8,760,440

 
2.21

 
9,017,727

 
2.39

 
9,136,419

 
2.46

Trading securities (A)
24,337

 
2.34

 
20,771

 
2.01

 
19,785

 
2.87

Non-marketable securities (A)
117,210

 
7.54

 
118,802

 
17.51

 
110,486

 
10.81

Total investment securities
8,901,987

 
2.29

 
9,157,300

 
2.59

 
9,266,690

 
2.56

 Short-term federal funds sold and securities purchased under agreements to resell
19,400

 
.49

 
10,371

 
.46

 
10,162

 
.39

 Long-term securities purchased under agreements to resell
847,829

 
2.31

 
1,021,741

 
2.10

 
850,000

 
1.97

Interest earning deposits with banks
81,139

 
.20

 
208,930

 
.25

 
122,953

 
.25

Total interest earning assets
19,308,074

 
3.49

 
20,030,580

 
3.52

 
19,393,282

 
3.67

Non-interest earning assets (B)
1,209,295

 
 
 
1,234,609

 
 
 
1,121,569

 
 
Total assets
$
20,517,369

 
 
 
$
21,265,189

 
 
 
$
20,514,851

 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
581,819

 
.15

 
$
581,174

 
.13

 
$
529,027

 
.17

Interest checking and money market
8,401,165

 
.21

 
8,638,073

 
.19

 
8,068,003

 
.29

Time open & C.D.’s of less than $100,000
1,101,399

 
.70

 
1,083,492

 
.68

 
1,186,324

 
.75

Time open & C.D.’s of $100,000 and over
1,004,708

 
.69

 
1,030,184

 
.65

 
1,367,472

 
.59

Total interest bearing deposits
11,089,091

 
.30

 
11,332,923

 
.28

 
11,150,826

 
.37

Borrowings:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1,217,036

 
.07

 
1,130,210

 
.07

 
1,147,421

 
.05

Other borrowings
108,819

 
3.11

 
103,766

 
3.25

 
112,024

 
3.26

Total borrowings
1,325,855

 
.32

 
1,233,976

 
.33

 
1,259,445

 
.33

Total interest bearing liabilities
12,414,946

 
.30
%
 
12,566,899

 
.28
%
 
12,410,271

 
.37
%
Non-interest bearing deposits
5,536,274

 
 
 
6,013,165

 
 
 
5,173,106

 
 
Other liabilities
296,178

 
 
 
399,160

 
 
 
789,564

 
 
Equity
2,269,971

 
 
 
2,285,965

 
 
 
2,141,910

 
 
Total liabilities and equity
$
20,517,369

 
 
 
$
21,265,189

 
 
 
$
20,514,851

 
 
Net interest income (T/E)
$
159,934

 
 
 
$
168,428

 
 
 
$
167,940

 
 
Net yield on interest earning assets
 
 
3.30
%
 
 
 
3.35
%
 
 
 
3.44
%
(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.
(B) The allowance for loan losses and unrealized gains/(losses) on available for sale securities are included in non-interest earning assets.
(C) Includes ($1.4 million) in inflation income on U.S. Treasury inflation-protected securities in the third quarter of 2012.

6


COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2012


For the quarter ended December 31, 2012, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $66.8 million, an increase of $5.3 million over the same quarter last year, and an increase of $785 thousand compared to the previous quarter. The slight increase in net income over the previous quarter resulted mainly from higher net interest income and fees totaling a combined $9.8 million, but offset by a higher provision for loan losses of $2.7 million, net securities losses of $3.7 million and growth in non-interest expense of $4.9 million. For the current quarter, the return on average assets was 1.25%, the return on average equity was 11.62%, and the efficiency ratio was 59.62%.

Compared to the same quarter last year, net interest income (tax equivalent) increased by $488 thousand to $168.4 million, while non-interest income increased $9.3 million to $103.3 million. The securities losses this quarter resulted mainly from private equity activities and compared to net gains of $4.9 million in the 4th quarter of 2011. Non-interest expense for the current quarter totaled $158.3 million, a slight increase over the same period last year. The provision for loan losses totaled $8.3 million, representing a decrease of $3.8 million from the amount recorded in the same quarter last year.

Balance Sheet Review
During the 4th quarter of 2012, average loans, including loans held for sale, increased $174.5 million compared to the previous quarter and increased $488.8 million, or 5.3%, compared to the same period last year. The increase in average loans over the previous quarter resulted from increases in most lending categories including growth in business (up $23.2 million), business real estate and construction (up $23.2 million), personal real estate (up $48.7 million) and consumer loans (up $67.5 million, mainly in automobile and fixed rate home equity loans). Consumer credit card loans also increased on average by $18.7 million. Growth in business loans mainly resulted from higher leasing activities while demand for construction and business real estate loans improved this quarter with modest loan growth. Demand for consumer automobile lending remained strong as average outstanding balances grew by $91.5 million. However, marine and RV loans, included in the consumer loan portfolio, continued to run off this quarter by $21.0 million, while home equity lines of credit also declined by $7.4 million.

Total available for sale investment securities (excluding fair value adjustments) averaged $9.0 billion this quarter, up $257.3 million when compared to the previous quarter. Purchases of new securities, totaling $1.3 billion in the 4th quarter of 2012, were offset by maturities and pay downs of $734.9 million. At December 31, 2012, the duration of the investment portfolio was 2.4 years, and maturities and pay downs of approximately $2.2 billion are expected to occur during the next 12 months.

Total average deposits increased $720.7 million, or 4.3%, during the 4th quarter of 2012 compared to the previous quarter. This increase in average deposits resulted mainly from growth in business demand (increase of $429.3 million) and money market (increase of $222.6 million) accounts. Certificate of deposit (CD) accounts also increased slightly mainly from growth in short-term jumbo CD's. Overall, $411.9 million of the deposit growth this quarter came from commercial deposits while the remaining $308.8 million in deposit growth was mostly from private banking

 
 
and retail banking customers. The average loans to deposits ratio in the current quarter was 55.5%, compared to 56.9% in the previous quarter.

During the current quarter, the Company's average borrowings declined $91.9 million compared to the previous quarter, mainly due to lower federal funds purchased this quarter.

Net Interest Income
Net interest income (tax equivalent) in the 4th quarter of 2012 amounted to $168.4 million compared with $159.9 million in the previous quarter, or an increase of $8.5 million. Net interest income this quarter increased slightly compared to the 4th quarter of last year. During the 4th quarter of 2012, the net yield on earning assets (tax equivalent) was 3.35%, compared with 3.30% in the previous quarter and 3.44% in the same period last year.

The increase in net interest income (tax equivalent) in the 4th quarter of 2012 compared to the previous quarter was mainly due to an increase in inflation interest of $4.5 million on the Company's inflation-protected securities as a result of the higher Consumer Price Indices published this quarter, on which this interest is based. Inflation income totaled $3.1 million this quarter. Also, the Company received a special dividend on a private equity investment this quarter totaling $2.2 million; however, a related offsetting fair value adjustment of $1.4 million was recorded on the same investment in net securities losses.

Compared to the previous quarter, interest on loans declined $937 thousand (tax-equivalent) as a result of lower average rates of 12 basis points offset by higher balances. The average rate on investment securities increased 30 basis points to 2.59% partly due to the higher inflation and dividend income mentioned above coupled with higher overall average balances. Also, rates on mortgage-backed securities increased due to lower premium amortization (reduction in amortization expense of $1.7 million) as prepayment speeds slowed.

Interest expense on deposits declined $412 thousand in the 4th quarter of 2012 compared with the previous quarter as overall rates declined slightly. Interest expense on borrowings also declined slightly.

Non-Interest Income
In the 4th quarter of 2012, total non-interest income amounted to $103.3 million, an increase of $9.3 million, or 9.9%, compared to the same period last year. Also, current quarter non-interest income increased $2.4 million when compared to amounts recorded in the previous quarter. The increase in non-interest income over the same period last year was mainly due to an increase in bank card fees, coupled with growth in trust fees and higher tax credit fee income.

Total bank card fees in the current quarter increased $5.4 million, or 14.9%, over the same period last year as a result of a 25.3% increase in corporate card fees, which totaled $18.9 million this quarter. Merchant and credit card fees also grew by 7.8% and 10.3%, respectively, reflecting increased holiday sales volumes and a 5th billing weekend in December not present in 2011. Debit card fees grew by 5.3% and totaled $8.8 million this quarter.



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COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2012



Trust fees for the quarter increased 10.2% compared to the same period last year, resulting mainly from growth in private client (up 10.5%) and institutional (up 12.3%) trust fees. Deposit account fees declined $322 thousand, or 1.6%, compared to last year as overdraft fees declined by $1.1 million, but were offset by growth in various other deposit fees of $986 thousand, or 38.8%. Capital market fees declined $516 thousand with low interest rates reducing correspondent bank demand for bonds this quarter. Other non-interest income grew by $2.2 million this quarter compared to the same period last year partly due to higher fees on sales of tax credits, which grew by $577 thousand, and additional swap fee income of $225 thousand. Also, in the 4th quarter of 2011 the Company wrote down the value of certain banking properties held for sale by $874 thousand, which did not reoccur this quarter.

Investment Securities Gains and Losses
Net securities losses, related mostly to private equity fair value adjustments, amounted to $3.7 million in the 4th quarter of 2012, compared to net gains of $3.2 million in the previous quarter and net gains of $4.9 million in the same quarter last year. The current quarter included unrealized net losses of $3.9 million on these private equity investments, coupled with a reduction to minority interest expense related to these losses totaling $461 thousand which is included in non-controlling interest expense. Year to date net gains and fair value adjustments on private equity investments totaled $6.0 million in 2012 compared with $13.2 million in 2011.

Also during the current quarter, the Company recorded credit-related impairment losses of $263 thousand on certain non-agency guaranteed mortgage-backed securities identified as other-than-temporarily impaired, compared to losses of $557 thousand in the previous quarter and $782 thousand in the same quarter last year. The cumulative credit-related impairment on these bonds totaled $11.3 million at quarter end. At December 31, 2012, the fair value of non-agency guaranteed mortgage-backed securities identified as other-than-temporarily impaired totaled $101.7 million, compared to $124.8 million at December 31, 2011.

Non-Interest Expense
Non-interest expense for the current quarter amounted to $158.3 million, an increase of $2.2 million over the same quarter last year and an increase of $4.9 million compared to the previous quarter. Compared to the 4th quarter of last year, salaries and benefits expense increased $6.5 million, or 7.4%, mainly due to an increase in salary costs of $2.0 million, or 3.4%, coupled with higher incentives paid which included a $1.1 million increase due to timing changes on expense for several commercial card incentive plans. Nearly half of the increased salaries costs resulted from staff investments in the trust, commercial card and mortgage servicing areas. Medical costs also increased by $1.2 million, or 29.2%, this quarter compared to last year as self-insured claims increased. Full-time equivalent employees totaled 4,708 and 4,745 at December 31, 2012 and 2011, respectively.

Compared to the 4th quarter of last year, occupancy, equipment and marketing expense declined $1.4 million on a combined basis mainly due to lower depreciation and reductions in property repairs and marketing expenditures. Data processing and software costs grew by $895 thousand, or 5.0%. This growth included higher data processing and bank card-related costs, but was partly offset by the renegotiation of a new merchant processing contract, which reduced 4th quarter costs by $523 thousand. Other non-interest
 

expense in the 4th quarter of 2011 included the reversal of a VISA indemnification obligation of $3.1 million (lowering expense) that did not reoccur in 2012.

Income Taxes
The effective tax rate for the Company was 29.3% in the current quarter, compared with 32.8% in the previous quarter and 32.4% in the 4th quarter of 2011. The lower rate in the current quarter resulted partly from tax benefits on the special dividend paid in the 4th quarter to the Company's employee stock ownership plan.

Credit Quality
Net loan charge-offs in the 4th quarter of 2012 amounted to $10.8 million, compared with $9.1 million in the prior quarter and $15.6 million in the 4th quarter of last year. The ratio of annualized net loan charge-offs to total average loans was .45% in the current quarter compared to .38% in the previous quarter.

For the 4th quarter of 2012, annualized net loan charge-offs on average consumer credit card loans amounted to 3.24%, compared with 3.42% in the previous quarter and 3.78% in the same period last year. Consumer loan net charge-offs for the quarter amounted to .54% of average consumer loans, compared to .59% in the previous quarter and .96% in the same quarter last year. The provision for loan losses for the current quarter totaled $8.3 million, an increase of $2.7 million over the previous quarter and $3.8 million lower than in the same period last year. The current quarter provision for loan losses was $2.5 million less than net loan charge-offs for the current quarter, as credit quality in the loan portfolio continued to improve. As a result, the allowance for loan losses was reduced to $172.5 million. At December 31, 2012 the allowance was 1.75% of total loans, excluding loans held for sale, and was 336% of total non-accrual loans.

At December 31, 2012, total non-performing assets amounted to $64.9 million, a decrease of $8.6 million from the previous quarter. Non-performing assets are comprised of non-accrual loans ($51.4 million) and foreclosed real estate ($13.5 million). At December 31, 2012, the balance of non-accrual loans, which represented .52% of loans outstanding, included business real estate loans of $17.3 million, construction and land loans of $13.7 million and business loans of $13.1 million. Loans more than 90 days past due and still accruing interest totaled $15.3 million at December 31, 2012.

Other
During the quarter ended December 31, 2012, the Company paid a 5% stock dividend and also paid a special cash dividend of $1.50 per share in addition to its normal cash dividend of $.23 per share. The Company also purchased approximately 774,000 shares of treasury stock at an average cost of $37.93 per share (per share price of $36.12 as adjusted for the 5% stock dividend).

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 statement.


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