EX-99.1 2 cbsh9302012ex991.htm EXHIBIT CBSH 9.30.2012 EX 99.1


Exhibit 99.1
                               CBSH
                   1000 Walnut Street / Post Office Box 419248 / Kansas City, Missouri 64151-6248 / 816.234.2000
                                                                 
FOR IMMEDIATE RELEASE:
Tuesday, October 16, 2012


COMMERCE BANCSHARES, INC. ANNOUNCES THIRD
QUARTER EARNINGS PER SHARE OF $.75

Commerce Bancshares, Inc. announced earnings of $.75 per share for the three months ended September 30, 2012 compared to $.72 per share in the third quarter of 2011, or an increase of 4.2%. Net income for the third quarter amounted to $66.0 million compared to $65.4 million in the same quarter last year and $70.7 million in the prior quarter. For the quarter, the return on average assets totaled 1.28%, the return on average equity was 11.6% and the efficiency ratio was 60.0%.

For the nine months ended September 30, 2012, earnings per share totaled $2.29 compared to $2.13 in the first nine months of 2011, an increase of 7.5%. Net income amounted to $202.5 million for the first nine months of 2012 compared with $194.8 million for the same period last year, or an increase of $7.7 million. The return on average assets for the first nine months of 2012 was 1.32%, the return on average equity was 12.1% and the efficiency ratio was 59.1%.
    
In announcing these results, David W. Kemper, Chairman and CEO, said, “Although record low interest rates continued to pressure our net interest income, we were pleased to report solid quarterly earnings which benefited from loan growth, low credit losses and good expense management. Compared to the previous quarter, the decline in net interest income was partly due to non-recurring interest received last quarter and a reduction of $6.2 million in interest on our inflation-protected government securities. Also, while non-interest income continued to be affected by recent debit card interchange regulations, commercial card fees grew 21.8% compared to last year and remained strong, while trust fees also increased 7.1%. Non-interest expense was flat compared to the same quarter of last year. Average loans for the quarter grew $209.4 million, or 2.3%, this quarter compared to the previous quarter and resulted from growth in business, personal real estate loans and consumer loans. Average deposits declined by $111.7 million this quarter, or .7%.”

Mr. Kemper continued, “Net loan charge-offs for the current quarter totaled $9.1 million, compared to $8.2 million in the previous quarter and $14.9 million in the third quarter of 2011. The increase in net loan charge-offs this quarter resulted from several large commercial loan recoveries totaling $3.6 million which were recorded during the second quarter. Overall commercial and consumer loan charge-offs remained low this quarter. During the current quarter, the provision for loan losses totaled $5.6 million, or $3.5 million less than net loan charge-offs, reflecting improved credit trends in our loan portfolio. Our allowance for loan losses amounted to $175.0 million this quarter, representing 3.2 times our non-performing loans. Total non-performing assets also decreased $8.8 million from the previous quarter to $73.4 million this quarter.”
        

(more)





 


Total assets at September 30, 2012 were $20.9 billion, total loans were $9.6 billion, and total deposits were $16.8 billion. During the quarter the Company repurchased approximately 98,000 shares of Company stock at an average price per share of $39.66.

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)
 
6/30/2012
 
9/30/2012
 
9/30/2011
Non-Accrual Loans
 
$
62,177

 
$
55,201

 
$
75,912

Foreclosed Real Estate
 
$
20,095

 
$
18,234

 
$
23,813

Total Non-Performing Assets
 
$
82,272

 
$
73,435


$
99,725

Non-Performing Assets to Loans
 
.88
%
 
.76
%
 
1.10
%
Non-Performing Assets to Total Assets
 
.40
%
 
.35
%
 
.48
%
Loans 90 Days & Over Past Due — Still Accruing
 
$
11,297

 
$
12,232

 
$
20,104

   
This financial news release, including management's discussion of third 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 Nine Months Ended
(Unaudited)
 
June 30,
2012
September 30,
2012
September 30,
2011
September 30,
2012
September 30,
2011
FINANCIAL SUMMARY (In thousands, except per share data)
 
 
Net interest income
 

$165,105


$153,811


$158,630


$478,653


$484,313

Taxable equivalent net interest income
 
171,186

159,934

164,317

496,786

501,575

Non-interest income
 
100,816

100,922

101,632

296,321

298,882

Investment securities gains, net
 
1,336

3,180

2,587

8,556

5,870

Provision for loan losses
 
5,215

5,581

11,395

18,961

39,372

Non-interest expense
 
156,340

153,391

153,746

460,192

461,219

Net income attributable to Commerce Bancshares, Inc.
 
70,733

66,006

65,352

202,538

194,839

Cash dividends
 
20,216

20,165

19,526

60,819

59,636

Net total loan charge-offs (recoveries)
 
8,214

9,082

14,895

28,461

48,872

Business
 
(3,600
)
202

889

(3,288
)
4,338

Real estate — construction and land
 
116

(102
)
1,215

234

4,326

Real estate — business
 
1,839

(25
)
1,429

3,309

2,832

Consumer credit card
 
5,930

6,277

7,103

18,380

24,631

Consumer
 
1,974

1,791

3,232

6,396

9,474

Revolving home equity
 
943

314

72

1,617

783

Real estate — personal
 
679

267

673

1,015

1,974

Overdraft
 
333

358

282

798

514

Per common share:
 
 
 
 
 
 
Net income — basic
 

$.80


$.75


$.72


$2.29


$2.14

Net income — diluted
 

$.80


$.75


$.72


$2.29


$2.13

Cash dividends
 

$.230


$.230


$.219


$.690


$.657

Diluted wtd. average shares o/s
 
87,672

87,192

89,737

87,804

90,724

RATIOS
 
 
 
 
 
 
Average loans to deposits (1)
 
55.26
%
56.89
%
58.29
%
55.89
%
60.27
%
Return on total average assets
 
1.38
%
1.28
%
1.32
%
1.32
%
1.37
%
Return on total average equity
 
12.80
%
11.57
%
12.15
%
12.13
%
12.41
%
Non-interest income to revenue (2)
 
37.91
%
39.62
%
39.05
%
38.24
%
38.16
%
Efficiency ratio (3)
 
58.53
%
59.99
%
58.71
%
59.14
%
58.57
%
AT PERIOD END
 
 
 
 
 
 
Book value per share based on total equity
 

$25.47


$26.33


$23.95

 
 
Market value per share
 

$37.90


$40.33


$33.10

 
 
Allowance for loan losses as a percentage of loans
 
1.90
%
1.82
%
2.07
%
 
 
Tier I leverage ratio
 
9.73
%
10.00
%
9.74
%
 
 
Tangible common equity to assets ratio (4)
 
10.16
%
10.47
%
9.72
%
 
 
Common shares outstanding
 
87,588,533

87,608,391

88,924,563

 
 
Shareholders of record
 
4,184

4,146

4,224

 
 
Number of bank/ATM locations
 
361

362

363

 
 
Full-time equivalent employees
 
4,702

4,707

4,762

 
 
OTHER QTD INFORMATION
 
 
 
 
 
 
High market value per share
 

$41.00


$42.74


$41.90

 
 
Low market value per share
 

$36.17


$37.71


$31.65

 
 
(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 Nine Months Ended
(Unaudited)
(In thousands, except per share data)
 
June 30,
2012
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Interest income
 

$174,624

 

$163,194

 

$170,835

 

$507,784

 

$524,748

Interest expense
 
9,519

 
9,383

 
12,205

 
29,131

 
40,435

Net interest income
 
165,105

 
153,811

 
158,630

 
478,653

 
484,313

Provision for loan losses
 
5,215

 
5,581

 
11,395

 
18,961

 
39,372

Net interest income after provision for loan losses
 
159,890

 
148,230

 
147,235

 
459,692

 
444,941

NON-INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Bank card transaction fees
 
38,434

 
39,488

 
42,149

 
112,655

 
120,915

Trust fees
 
23,833

 
23,681

 
22,102

 
70,328

 
66,218

Deposit account charges and other fees
 
19,975

 
19,873

 
21,939

 
59,184

 
62,028

Capital market fees
 
5,010

 
5,110

 
5,556

 
16,991

 
15,255

Consumer brokerage services
 
2,576

 
2,441

 
2,333

 
7,543

 
7,876

Loan fees and sales
 
1,706

 
1,358

 
2,034

 
4,625

 
5,933

Other
 
9,282

 
8,971

 
5,519

 
24,995

 
20,657

Total non-interest income
 
100,816

 
100,922

 
101,632

 
296,321

 
298,882

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
 
 
 
 
 
 
 
 
 
Impairment (losses) reversals on debt securities
 
3

 
5,989

 
(1,200
)
 
11,579

 
2,986

Noncredit-related losses (reversals) on securities not expected to be sold
 
(353
)
 
(6,546
)
 
369

 
(12,806
)
 
(4,741
)
Net impairment losses
 
(350
)
 
(557
)
 
(831
)
 
(1,227
)
 
(1,755
)
Realized gains on sales and fair value adjustments
 
1,686

 
3,737

 
3,418

 
9,783

 
7,625

Investment securities gains, net
 
1,336

 
3,180

 
2,587

 
8,556

 
5,870

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
87,511

 
89,292

 
85,700

 
266,346

 
257,315

Net occupancy
 
11,105

 
11,588

 
11,510

 
33,953

 
34,760

Equipment
 
4,999

 
4,976

 
5,390

 
15,164

 
16,669

Supplies and communication
 
5,667

 
5,400

 
5,674

 
16,680

 
16,898

Data processing and software
 
18,282

 
19,279

 
16,232

 
55,030

 
50,230

Marketing
 
4,469

 
4,100

 
4,545

 
12,391

 
13,298

Deposit insurance
 
2,618

 
2,608

 
2,772

 
7,746

 
10,443

Other
 
21,689

 
16,148

 
21,923

 
52,882

 
61,606

Total non-interest expense
 
156,340

 
153,391

 
153,746

 
460,192

 
461,219

Income before income taxes
 
105,702

 
98,941

 
97,708

 
304,377

 
288,474

Less income taxes
 
34,466

 
32,155

 
31,699

 
99,541

 
91,898

Net income
 
71,236

 
66,786

 
66,009

 
204,836

 
196,576

Less non-controlling interest expense
 
503

 
780

 
657

 
2,298

 
1,737

Net income attributable to Commerce Bancshares, Inc.
 

$70,733

 

$66,006

 

$65,352

 

$202,538

 

$194,839

Net income per common share — basic
 

$.80

 

$.75

 

$.72

 

$2.29

 

$2.14

Net income per common share — diluted
 

$.80

 

$.75

 

$.72

 

$2.29

 

$2.13


4



COMMERCE BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

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

$9,376,915

 

$9,638,645

 

$9,073,123

Allowance for loan losses
 
(178,533
)
 
(175,032
)
 
(188,038
)
Net loans
 
9,198,382

 
9,463,613

 
8,885,085

Loans held for sale
 
8,874

 
8,741

 
39,576

Investment securities:
 
 
 
 
 
 
Available for sale
 
9,206,451

 
9,020,951

 
9,278,066

Trading
 
14,313

 
13,595

 
9,695

Non-marketable
 
116,190

 
117,540

 
111,808

Total investment securities
 
9,336,954

 
9,152,086

 
9,399,569

Short-term federal funds sold and securities purchased under agreements to resell
 
7,455

 
10,475

 
11,400

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

 
850,000

 
850,000

Interest earning deposits with banks
 
92,544

 
132,144

 
133,419

Cash and due from banks
 
410,666

 
426,742

 
424,861

Land, buildings and equipment — net
 
350,897

 
350,040

 
368,965

Goodwill
 
125,585

 
125,585

 
125,585

Other intangible assets — net
 
6,381

 
5,804

 
8,452

Other assets
 
355,253

 
353,539

 
391,756

Total assets
 
$
20,742,991

 
$
20,878,769

 
$
20,638,668

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Non-interest bearing
 

$5,637,373

 

$5,814,932

 

$5,003,587

Savings, interest checking and money market
 
8,983,090

 
9,025,688

 
8,416,839

Time open and C.D.’s of less than $100,000
 
1,113,824

 
1,094,215

 
1,204,896

Time open and C.D.’s of $100,000 and over
 
1,097,346

 
914,795

 
1,388,755

Total deposits
 
16,831,633

 
16,849,630

 
16,014,077

Federal funds purchased and securities sold under agreements to repurchase
 
1,305,745

 
1,257,949

 
1,057,728

Other borrowings
 
111,292

 
103,744

 
111,869

Other liabilities
 
263,552

 
360,374

 
1,325,029

Total liabilities
 
18,512,222

 
18,571,697

 
18,508,703

Stockholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
446,387

 
446,387

 
436,481

Capital surplus
 
1,033,523

 
1,033,515

 
980,176

Retained earnings
 
671,297

 
717,138

 
690,981

Treasury stock
 
(61,388
)
 
(60,644
)
 
(96,205
)
Accumulated other comprehensive income
 
136,732

 
166,040

 
115,781

Total stockholders’ equity
 
2,226,551

 
2,302,436

 
2,127,214

Non-controlling interest
 
4,218

 
4,636

 
2,751

Total equity
 
2,230,769

 
2,307,072

 
2,129,965

Total liabilities and equity
 
$
20,742,991

 
$
20,878,769

 
$
20,638,668



5



COMMERCE BANCSHARES, INC. and SUBSIDIARIES
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
(Unaudited)
(Dollars in thousands)
For the Three Months Ended
June 30, 2012
 
September 30, 2012
 
September 30, 2011
 
Average Balance
 
Avg. Rates Earned/Paid
 
Average Balance
 
Avg. Rates Earned/Paid
 
Average Balance
 
Avg. Rates Earned/Paid
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Business (A)
$
2,895,167

 
3.58
%
 
$
3,018,475

 
3.39
%
 
$
2,815,064

 
3.56
%
Real estate — construction and land
360,000

 
4.24

 
339,908

 
4.30

 
412,490

 
4.42

Real estate — business
2,205,561

 
4.71

 
2,182,584

 
4.39

 
2,123,034

 
4.74

Real estate — personal
1,475,930

 
4.46

 
1,523,148

 
4.31

 
1,430,014

 
4.75

Consumer
1,134,838

 
5.73

 
1,205,318

 
5.54

 
1,104,684

 
6.20

Revolving home equity
449,416

 
4.17

 
444,076

 
4.17

 
466,503

 
4.27

Consumer credit card
712,708

 
11.87

 
730,104

 
11.83

 
735,179

 
11.59

Overdrafts
5,663

 

 
5,353

 

 
6,936

 

Total loans (B)
9,239,283

 
4.95

 
9,448,966

 
4.76

 
9,093,904

 
5.07

Loans held for sale
9,053

 
3.91

 
8,753

 
3.86

 
41,677

 
2.57

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
330,648

 
7.58

 
329,172

 
(.07
)
(C)
327,916

 
3.40

Government-sponsored enterprise obligations
265,620

 
2.06

 
276,505

 
1.65

 
262,087

 
2.92

State and municipal obligations (A)
1,322,987

 
4.03

 
1,387,624

 
3.89

 
1,185,263

 
4.20

Mortgage-backed securities
4,010,276

 
2.89

 
3,766,602

 
2.62

 
3,764,822

 
2.95

Asset-backed securities
2,900,122

 
1.13

 
2,878,941

 
1.10

 
2,403,062

 
1.15

Other marketable securities (A)
135,930

 
4.92

 
121,596

 
4.50

 
172,588

 
4.27

Total available for sale securities (B)
8,965,583

 
2.67

 
8,760,440

 
2.21

 
8,115,738

 
2.64

Trading securities (A)
22,748

 
2.65

 
24,337

 
2.34

 
20,770

 
2.52

Non-marketable securities (A)
122,651

 
8.60

 
117,210

 
7.54

 
110,585

 
6.59

Total investment securities
9,110,982

 
2.75

 
8,901,987

 
2.29

 
8,247,093

 
2.69

 Short-term federal funds sold and securities purchased under agreements to resell
22,139

 
.53

 
19,400

 
.49

 
10,927

 
.47

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

 
2.17

 
847,829

 
2.31

 
850,000

 
1.83

Interest earning deposits with banks
163,075

 
.28

 
81,139

 
.20

 
326,302

 
.26

Total interest earning assets
19,394,532

 
3.75

 
19,308,074

 
3.49

 
18,569,903

 
3.77

Non-interest earning assets (B)
1,154,720

 
 
 
1,209,295

 
 
 
1,094,161

 
 
Total assets
$
20,549,252

 
 
 
$
20,517,369

 
 
 
$
19,664,064

 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
584,196

 
.12

 
$
581,819

 
.15

 
$
534,295

 
.19

Interest checking and money market
8,369,306

 
.21

 
8,401,165

 
.21

 
7,756,104

 
.32

Time open & C.D.’s of less than $100,000
1,128,716

 
.71

 
1,101,399

 
.70

 
1,231,280

 
.78

Time open & C.D.’s of $100,000 and over
1,250,164

 
.59

 
1,004,708

 
.69

 
1,372,842

 
.62

Total interest bearing deposits
11,332,382

 
.30

 
11,089,091

 
.30

 
10,894,521

 
.40

Borrowings:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1,109,693

 
.06

 
1,217,036

 
.07

 
1,016,623

 
.11

Other borrowings
111,336

 
3.16

 
108,819

 
3.11

 
111,930

 
3.28

Total borrowings
1,221,029

 
.35

 
1,325,855

 
.32

 
1,128,553

 
.43

Total interest bearing liabilities
12,553,411

 
.30
%
 
12,414,946

 
.30
%
 
12,023,074

 
.40
%
Non-interest bearing deposits
5,404,687

 
 
 
5,536,274

 
 
 
4,778,780

 
 
Other liabilities
367,763

 
 
 
296,178

 
 
 
728,974

 
 
Equity
2,223,391

 
 
 
2,269,971

 
 
 
2,133,236

 
 
Total liabilities and equity
$
20,549,252

 
 
 
$
20,517,369

 
 
 
$
19,664,064

 
 
Net interest income (T/E)
$
171,186

 
 
 
$
159,934

 
 
 
$
164,317

 
 
Net yield on interest earning assets
 
 
3.55
%
 
 
 
3.30
%
 
 
 
3.51
%
(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 Third Quarter Results
September 30, 2012

For the quarter ended September 30, 2012, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $66.0 million, an increase of $654 thousand over the same quarter last year, and a decrease of $4.7 million compared to the previous quarter. The decrease in net income from the previous quarter resulted mainly from non-recurring interest income of $2.4 million reported in the 2nd quarter of 2012 coupled with a $6.2 million decline in interest income on the Company's holdings of inflation-protected securities. For the current quarter, the return on average assets was 1.28%, the return on average equity was 11.57%, and the efficiency ratio was 59.99%.

Compared to the same quarter last year, net interest income (tax equivalent) decreased by $4.4 million to $159.9 million, while non-interest income increased slightly to $100.9 million. Securities gains from private equity activities totaled $3.7 million in the 3rd quarter of 2012, compared to $3.4 million in the same period last year and $1.7 million in the prior quarter. Non-interest expense for the current quarter totaled $153.4 million, a decrease of $355 thousand from the same period last year. The provision for loan losses totaled $5.6 million, representing a decline of $5.8 million from the amount recorded in the same quarter last year.

Balance Sheet Review
During the 3rd quarter of 2012, average loans, including loans held for sale, increased $209.4 million compared to the previous quarter and increased $322.1 million, or 3.5%, compared to the same period last year. The increase in average loans over the previous quarter resulted from growth in business (up $123.3 million), personal real estate (up $47.2 million) and consumer loans (up $70.5 million, mainly in automobile and fixed rate home equity loans). Consumer credit card loans also increased on average by $17.4 million. Wholesale auto floor plan, lease and tax-free loans all contributed to the growth in business loans. Demand for consumer automobile lending remained solid as average outstanding balances grew by $71.1 million. Marine and RV loans, included in the consumer loan portfolio, continued to run off this quarter by $24.4 million, while construction loans declined by $20.1 million and business real estate loans declined by $23.0 million.

Total available for sale investment securities (excluding fair value adjustments) averaged $8.8 billion this quarter, down $205.1 million when compared to the previous quarter. Purchases of new securities, totaling $636.4 million in the 3rd quarter of 2012, were offset by maturities and pay downs of $849.7 million. At September 30, 2012, the duration of the investment portfolio was 2.0 years, and maturities and pay downs of approximately $2.1 billion are expected to occur during the next 12 months.

Total average deposits decreased $111.7 million, or .7%, during the 3rd quarter of 2012 compared to the previous quarter. This decrease in average deposits resulted mainly from a decline in certificates of deposit (CD) of $272.8 million, but was partly offset by growth in business demand (increase of $189.4 million), money market (increase of $21.8 million) and interest checking accounts (increase of $10.1 million). The majority of the decline in average CD balances was in short-term jumbo CD's, which are not considered core deposits. The average loans to deposits ratio in the current quarter was 56.9%, compared to 55.3% in the previous quarter.

 
During the current quarter, the Company's average borrowings increased $104.8 million compared to the previous quarter, mainly due to higher federal funds purchased and customer repurchase agreement balances.

Net Interest Income
Net interest income (tax equivalent) in the 3rd quarter of 2012 amounted to $159.9 million compared with $171.2 million in the previous quarter, or a decrease of $11.3 million. Net interest income this quarter decreased $4.4 million compared to the 3rd quarter of last year. During the 3rd quarter of 2012, the net yield on earning assets (tax equivalent) was 3.30%, compared with 3.55% in the previous quarter and 3.51% in the same period last year.

The decrease in net interest income (tax equivalent) in the 3rd quarter of 2012 compared to the previous quarter, which amounted to $11.3 million, was mainly due to a decrease in inflation interest of $6.2 million on the Company's inflation-protected securities (TIPs). The lower inflation interest was directly related to the lower Consumer Price Indices published this quarter, on which this interest is based. Also, the Company received interest in the 2nd quarter totaling $2.4 million from several non-performing commercial loans and the early pay off of a commercial real estate loan which did not re-occur in the current quarter. Excluding the effects of the inflation income on the TIPs and the non-recurring interest mentioned above, the net yield on earning assets in the 2nd quarter would have been 3.40% (tax-equivalent) and would compare more directly to the net yield of 3.30% reported in the current quarter.
    
Compared to the previous quarter, interest on loans declined by $550 thousand (tax-equivalent) due mainly to lower rates earned on most commercial loan types but offset by higher average balances on business, consumer, consumer credit card, and personal real estate loans. Interest on investment securities declined $11.1 million (tax-equivalent) this quarter, partly due to the effects of the TIPs mentioned above of $6.2 million coupled with lower rates on most security types and lower balances of mortgage-backed securities. The effects on premium amortization on mortgage and asset-backed securities due to change in pre-payment speeds this quarter was not significant.

Interest expense on deposits declined $155 thousand in the 3rd quarter of 2012 compared with the previous quarter mainly due to a decrease in average CD balances, which reduced interest expense by approximately $205 thousand. Overall rates paid on total interest bearing deposits totaled .30% and was unchanged from the previous quarter. Interest expense on borrowings increased slightly this quarter, due mainly to higher average balances of federal funds purchased.
 
Non-Interest Income
In the 3rd quarter of 2012, total non-interest income amounted to $100.9 million, a decrease of $710 thousand when compared to $101.6 million in the same period last year. Also, current quarter non-interest income increased slightly when compared to $100.8 million recorded in the previous quarter. The decrease in non-interest income from the same period last year was mainly due to a decline in debit card interchange fees of $6.8 million, coupled with lower overdraft fees, but offset by higher corporate card and trust fees.


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COMMERCE BANCSHARES, INC.
Management Discussion of Third Quarter Results
September 30, 2012


Total bank card fees in the current quarter declined $2.7 million, or 6.3%, from the same period last year as a result of a 43.8% decline in debit card interchange fees noted above (effect of new regulations in the 4th quarter of 2011) but was partly offset by growth in corporate card fees of $3.3 million, or 21.8%. Corporate card and debit card fees for the current quarter totaled $18.5 million and $8.7 million, respectively. Merchant fees grew by 8.1%, totaling $6.5 million for the quarter, while credit card fees grew 6.2% and totaled 5.8 million.

Trust fees for the quarter increased 7.1% compared to the same period last year, resulting mainly from growth in personal, institutional and corporate trust fees. Deposit account fees declined $2.1 million, or 9.4%, compared to last year as overdraft fees declined by $2.9 million, but were offset by growth in various other deposit fees of $759 thousand, or 29.2%. Other non-interest income in the current quarter increased $3.5 million compared to the same period last year, partly due to higher fees on leasing and international activities and sales of state tax credits to customers. Also, in the third quarter of 2011 the Company wrote down the value of certain banking properties held for sale by $1.7 million.

Investment Securities Gains and Losses
Net securities gains (which related mostly to private equity activities) amounted to $3.2 million in the 3rd quarter of 2012, compared to net gains of $1.3 million in the previous quarter and net gains of $2.6 million in the same quarter last year. The current quarter included a gain of $3.7 million related to fair value adjustments and sales of the Company's private equity investments. Minority interest expense related to these gains totaled $525 thousand and is included in non-controlling interest expense. Year to date net gains and fair value adjustments on private equity investments totaled $9.4 million in 2012 compared with $7.4 million in 2011.

Also during the current quarter, the Company recorded credit-related impairment losses of $557 thousand on certain non-agency guaranteed mortgage-backed securities identified as other-than-temporarily impaired, compared to losses of $350 thousand in the previous quarter and $831 thousand in the same quarter last year. The cumulative credit-related impairment on these bonds totaled $11.1 million at quarter end. At September 30, 2012, the fair value of non-agency guaranteed mortgage-backed securities identified as other-than-temporarily impaired totaled $108.1 million, compared to $134.7 million at September 30, 2011.

Non-Interest Expense
Non-interest expense for the current quarter amounted to $153.4 million, a decrease of $355 thousand from the same quarter last year and a decrease of $2.9 million compared to the previous quarter. Compared to the 3rd quarter of last year, salaries and benefits expense increased $3.6 million, or 4.2%, mainly due to an increase in salary costs of $1.7 million, or 2.3%, coupled with an increase in medical costs which grew by $1.1 million. Full-time equivalent employees totaled 4,707 and 4,762 at September 30, 2012 and 2011, respectively.

Compared to the 3rd quarter of last year, occupancy, supplies and equipment expense declined $610 thousand on a combined basis mainly due to lower depreciation, postage and communication costs. Data processing and software costs grew by $3.0 million, or 18.8%, mainly due to $2.5 million in higher bank card-related costs. Other non-interest expense in the 3rd quarter of 2011
 
included an expense accrual of $5.9 million related to a loss contingency for litigation that was ultimately resolved later in 2011, while other expense in the prior quarter included a charge of $5.7 million related to certain VISA U.S.A., Inc. litigation costs.

Income Taxes
The effective tax rate for the Company was 32.8% in the current quarter, compared with 32.8% in the previous quarter and 32.7% in the 3rd quarter of 2011.

Credit Quality
Net loan charge-offs in the 3rd quarter of 2012 amounted to $9.1 million, compared with $8.2 million in the prior quarter and $14.9 million in the 3rd quarter of last year. Net loan charge-offs in the 2nd quarter of 2012 included several large commercial loan recoveries totaling $3.6 million and reduced overall net loan losses in that quarter. The ratio of annualized net loan charge-offs to total average loans was .38% in the current quarter compared to .36% in the previous quarter.

For the 3rd quarter of 2012, annualized net loan charge-offs on average consumer credit card loans amounted to 3.42%, compared with 3.35% in the previous quarter and 3.83% in the same period last year. Consumer loan net charge-offs for the quarter amounted to .59% of average consumer loans, compared to .70% in the previous quarter and 1.16% in the same quarter last year. The provision for loan losses for the current quarter totaled $5.6 million, an increase of $366 thousand over the previous quarter and $5.8 million lower than in the same period last year. The current quarter provision for loan losses was $3.5 million less than net loan charge-offs for the current quarter due to improved credit trends in the loan portfolio, thereby reducing the allowance for loan losses to $175.0 million. At September 30, 2012 the allowance was 1.82% of total loans, excluding loans held for sale, and was 317% of total non-accrual loans.

At September 30, 2012, total non-performing assets amounted to $73.4 million, a decrease of $8.8 million from the previous quarter. Non-performing assets are comprised of non-accrual loans ($55.2 million) and foreclosed real estate ($18.2 million). At September 30, 2012, the balance of non-accrual loans, which represented .57% of loans outstanding, included business real estate loans of $18.4 million, construction and land loans of $15.4 million and business loans of $14.1 million. Loans more than 90 days past due and still accruing interest totaled $12.2 million at September 30, 2012.

Other
During the quarter ended September 30, 2012, the Company purchased approximately 98,000 shares of treasury stock at an average cost of $39.66.

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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