COMMERCE BANCSHARES INC /MO/ - FORM 8-K - EX-99.1 - EXHIBIT 99.1

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Exhibit 99.1



	CBSH
1000 Walnut Street / Suite 700 / Kansas City, Missouri 64106 / 816.234.2000

FOR IMMEDIATE RELEASE:

Thursday, January 18, 2018

COMMERCE BANCSHARES, INC. REPORTS RECORD

FOURTH QUARTER EARNINGS OF $94 MILLION

Commerce Bancshares, Inc. announced record earnings of $.86 per common share for the three months ended December 31, 2017 compared to $.65 per share in the same quarter last year and $.67 per share in the prior quarter. Net income attributable to Commerce Bancshares, Inc. for the fourth quarter amounted to $94.4 million, compared to $71.6 million in the fourth quarter of 2016 and $74.6 million in the prior quarter. There were several extraordinary items which occurred in the 4^th quarter, including a previously announced $25 million contribution of appreciated stock to the Commerce Bancshares Foundation and a one-time bonus to certain employees of approximately $3.3 million. These two items combined with adjustments for the new corporate tax legislation added $.12 per share for this period. For the quarter, the return on average assets was 1.50%, the return on average common equity was 14.2%, and the efficiency ratio was 67.9%.

For the year ended December 31, 2017, earnings per common share totaled $2.89 compared to $2.49 in 2016, or an increase of 16.1%. Net income attributable to Commerce Bancshares, Inc. for the year ended December 31, 2017 increased 16.0% to $319.4 million compared to $275.4 million last year. For the current year, the return on average assets was 1.28%, and the return on average common equity was 12.5%.

In announcing these results, David W. Kemper, Chairman and CEO, said, “Core earnings were strong this quarter driven by growth in net interest income, higher fee income, solid expense control and continued low credit losses. Our net interest margin continued to expand, driven by increased rates on both our loan and investment portfolios, while deposit costs remained stable. We saw strong growth from both our trust and commercial card businesses, which increased 12.9% and 14.3%, respectively, over the same quarter in the prior year. Non-interest expense increased just 2.3% over the same quarter last year when adjusted for the one-time bonus and foundation contribution, as we continue to focus on expenses. This quarter total average loans increased $183.0 million, or 5.3% annualized over the prior quarter, driven by growth in construction, business, business real estate, consumer and consumer credit card lending activities.”

(more)

Mr. Kemper added, “Credit quality remains strong, and capital and liquidity levels continue to be among the best in the banking industry. For the current quarter, net loan charge-offs totaled $11.0 million, up slightly over the prior quarter. This small increase was due mainly to growth in net loan charge-offs in business loans, offset by lower automobile loan net charge-offs. The ratio of annualized net loan charge-offs to average loans was .32% this quarter compared to .31% last quarter. Non-performing assets decreased this quarter to $12.7 million, or a decline of $2.0 million from the prior quarter. During the current quarter, the provision for loan losses exceeded net loan charge-offs by $1.7 million, and the allowance for loan losses amounted to $159.5 million, or 1.14% of period end loans.”

Total assets at December 31, 2017 were $24.8 billion, total loans were $14.0 billion, and total deposits were $20.4 billion. During the fourth quarter of 2017, the Company distributed a 5% stock dividend on its common stock. This quarter the Company also paid an annualized 6% cash dividend on its preferred stock and a cash dividend of $.214 per common share, as restated for the 5% stock dividend.

Commerce Bancshares, Inc. is a regional bank holding company offering a full range of financial products to consumers and commercial customers including personal banking, lending, mortgage banking, wealth management, brokerage and capital markets services. The Company currently operates in approximately 330 locations in the central United States and has a nationwide presence in the commercial payments industry.

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 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 Year Ended
(Unaudited) (Dollars in thousands, except per share data)	December 31, 2017			September 30, 2017			December 31, 2016			December 31, 2017			December 31, 2016
FINANCIAL SUMMARY
Net interest income		$190,008			$182,591			$173,202			$733,679			$680,049
Non-interest income	124,212			122,242			119,479			486,604			474,392
Total revenue	314,220			304,833			292,681			1,220,283			1,154,441
Investment securities gains (losses), net	27,209			(3,037		)	3,651			25,051			(53		)
Provision for loan losses	12,654			10,704			10,400			45,244			36,318
Non-interest expense	213,688			184,572			181,261			769,684			717,065
Income before taxes	115,087			106,520			104,671			430,406			401,005
Income taxes	20,104			32,294			32,297			110,506			124,151
Non-controlling interest expense (income)	628			(338		)	795			517			1,463
Net income attributable to Commerce Bancshares, Inc.	94,355			74,564			71,579			319,383			275,391
Preferred stock dividends	2,250			2,250			2,250			9,000			9,000
Net income available to common shareholders		$92,105			$72,314			$69,329			$310,383			$266,391
Earnings per common share:
Net income — basic		$.86			$.68			$.65			$2.90			$2.50
Net income — diluted		$.86			$.67			$.65			$2.89			$2.49
Effective tax rate	17.56		%	30.22		%	31.09		%	25.71		%	31.07		%
Tax equivalent net interest income		$197,917			$190,497			$181,301			$766,601			$711,433
Average total interest earning assets ⁽¹⁾	$	23,851,260		$	23,790,684		$	23,775,165		$	23,957,929		$	23,378,121
Diluted wtd. average shares outstanding	105,976,402			105,981,083			105,586,262			105,927,203			105,523,631

RATIOS
Average loans to deposits ⁽²⁾	68.15		%	66.96		%	64.24		%	66.18		%	63.71		%
Return on total average assets	1.50			1.19			1.14			1.28			1.12
Return on average common equity ⁽³⁾	14.17			11.35			11.48			12.46			11.33
Non-interest income to total revenue	39.53			40.10			40.82			39.88			41.09
Efficiency ratio ⁽⁴⁾	67.91			60.44			61.82			62.97			61.98
Net yield on interest earning assets	3.29			3.18			3.03			3.20			3.04

EQUITY SUMMARY
Cash dividends per common share		$.214			$.214			$.204			$.857			$.816
Cash dividends on common stock		$22,897			$22,906			$21,776			$91,619			$87,070
Cash dividends on preferred stock		$2,250			$2,250			$2,250			$9,000			$9,000
Book value per common share ⁽⁵⁾		$24.14			$23.99			$22.12
Market value per common share ⁽⁵⁾		$55.84			$55.02			$55.06
High market value per common share		$57.91			$56.42			$56.40
Low market value per common share		$52.07			$49.43			$43.21
Common shares outstanding ⁽⁵⁾	106,615,043			106,706,732			106,534,010
Tangible common equity to tangible assets ⁽⁶⁾	9.84		%	9.72		%	8.66		%
Tier I leverage ratio	10.39		%	10.16		%	9.55		%

OTHER QTD INFORMATION
Number of bank/ATM locations	327			334			336
Full-time equivalent employees	4,800			4,811			4,784


(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 Year Ended
(Unaudited) (In thousands, except per share data)	December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016
Interest income		$201,572			$194,244			$193,594			$187,997			$181,498			$777,407			$713,052
Interest expense	11,564			11,653			10,787			9,724			8,296			43,728			33,003
Net interest income	190,008			182,591			182,807			178,273			173,202			733,679			680,049
Provision for loan losses	12,654			10,704			10,758			11,128			10,400			45,244			36,318
Net interest income after provision for loan losses	177,354			171,887			172,049			167,145			162,802			688,435			643,731
NON-INTEREST INCOME
Bank card transaction fees	47,717			44,521			44,999			43,204			45,338			180,441			181,879
Trust fees	35,405			34,620			33,120			32,014			31,360			135,159			121,795
Deposit account charges and other fees	22,598			22,659			22,861			21,942			22,134			90,060			86,394
Capital market fees	1,743			1,755			2,156			2,342			2,679			7,996			10,655
Consumer brokerage services	3,576			3,679			3,726			3,649			3,409			14,630			13,784
Loan fees and sales	3,099			3,590			4,091			3,168			2,583			13,948			11,412
Other	10,074			11,418			12,131			10,747			11,976			44,370			48,473
Total non-interest income	124,212			122,242			123,084			117,066			119,479			486,604			474,392
INVESTMENT SECURITIES GAINS (LOSSES), NET	27,209			(3,037		)	1,651			(772		)	3,651			25,051			(53		)
NON-INTEREST EXPENSE
Salaries and employee benefits	115,741			111,382			108,829			112,369			108,639			448,321			427,310
Net occupancy	11,280			11,459			11,430			11,443			11,529			45,612			46,290
Equipment	4,692			4,491			4,776			4,609			4,884			18,568			19,141
Supplies and communication	6,118			5,517			5,446			5,709			5,645			22,790			24,135
Data processing and software	23,093			22,700			23,356			23,097			23,390			92,246			92,722
Marketing	3,937			4,676			4,488			3,224			3,431			16,325			16,032
Deposit insurance	3,444			3,479			3,592			3,471			3,443			13,986			13,327
Community service	25,511			3,006			2,916			2,944			822			34,377			3,906
Other	19,872			17,862			19,761			19,964			19,478			77,459			74,202
Total non-interest expense	213,688			184,572			184,594			186,830			181,261			769,684			717,065
Income before income taxes	115,087			106,520			112,190			96,609			104,671			430,406			401,005
Less income taxes	20,104			32,294			33,201			24,907			32,297			110,506			124,151
Net income	94,983			74,226			78,989			71,702			72,374			319,900			276,854
Less non-controlling interest expense (income)	628			(338		)	29			198			795			517			1,463
Net income attributable to Commerce Bancshares, Inc.	94,355			74,564			78,960			71,504			71,579			319,383			275,391
Less preferred stock dividends	2,250			2,250			2,250			2,250			2,250			9,000			9,000
Net income available to common shareholders		$92,105			$72,314			$76,710			$69,254			$69,329			$310,383			$266,391
Net income per common share — basic		$.86			$.68			$.71			$.65			$.65			$2.90			$2.50
Net income per common share — diluted		$.86			$.67			$.71			$.65			$.65			$2.89			$2.49

OTHER INFORMATION
Return on total average assets	1.50		%	1.19		%	1.26		%	1.15		%	1.14		%	1.28		%	1.12		%
Return on average common equity ⁽¹⁾	14.17			11.35			12.48			11.74			11.48			12.46			11.33
Efficiency ratio ⁽²⁾	67.91			60.44			60.24			63.14			61.82			62.97			61.98
Effective tax rate	17.56			30.22			29.60			25.83			31.09			25.71			31.07
Net yield on interest earning assets	3.29			3.18			3.19			3.14			3.03			3.20			3.04
Tax equivalent net interest income		$197,917			$190,497			$190,865			$187,322			$181,301			$766,601			$711,433


(1)	Annualized net income available to common shareholders divided by average total equity less preferred stock.


(2)	The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - PERIOD END



(Unaudited) (In thousands)	December 31, 2017			September 30, 2017			December 31, 2016
ASSETS
Loans
Business	$	4,958,554		$	4,834,037		$	4,776,365
Real estate — construction and land	968,820			921,609			791,236
Real estate — business	2,697,452			2,700,174			2,643,374
Real estate — personal	2,062,787			2,029,302			2,010,397
Consumer	2,104,487			2,113,438			1,990,801
Revolving home equity	400,587			391,308			413,634
Consumer credit card	783,864			752,379			776,465
Overdrafts	7,123			3,245			10,464
Total loans	13,983,674			13,745,492			13,412,736
Allowance for loan losses	(159,532		)	(157,832		)	(155,932		)
Net loans	13,824,142			13,587,660			13,256,804
Loans held for sale	21,398			17,337			14,456
Investment securities:
Available for sale	8,774,280			9,109,287			9,649,203
Trading	18,269			24,605			22,225
Non-marketable	100,758			99,268			99,558
Total investment securities	8,893,307			9,233,160			9,770,986
Federal funds sold and short-term securities purchased under agreements to resell	42,775			32,630			15,470
Long-term securities purchased under agreements to resell	700,000			700,000			725,000
Interest earning deposits with banks	30,631			105,422			272,275
Cash and due from banks	438,439			461,724			494,690
Land, buildings and equipment — net	335,110			335,348			337,705
Goodwill	138,921			138,921			138,921
Other intangible assets — net	7,618			7,388			6,709
Other assets	401,074			359,551			608,408
Total assets	$	24,833,415		$	24,979,141		$	25,641,424
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	7,158,962		$	7,536,127		$	7,429,398
Savings, interest checking and money market	11,499,620			11,091,200			11,430,789
Time open and C.D.’s of less than $100,000	634,646			657,891			713,075
Time open and C.D.’s of $100,000 and over	1,132,218			1,158,555			1,527,833
Total deposits	20,425,446			20,443,773			21,101,095
Federal funds purchased and securities sold under agreements to repurchase	1,507,138			1,408,984			1,723,905
Other borrowings	1,758			102,553			102,049
Other liabilities	180,889			319,354			213,243
Total liabilities	22,115,231			22,274,664			23,140,292
Stockholders’ equity:
Preferred stock	144,784			144,784			144,784
Common stock	535,407			510,015			510,015
Capital surplus	1,815,360			1,548,318			1,552,454
Retained earnings	221,374			440,261			292,849
Treasury stock	(14,473		)	(9,895		)	(15,294		)
Accumulated other comprehensive income	14,108			67,061			10,975
Total stockholders’ equity	2,716,560			2,700,544			2,495,783
Non-controlling interest	1,624			3,933			5,349
Total equity	2,718,184			2,704,477			2,501,132
Total liabilities and equity	$	24,833,415		$	24,979,141		$	25,641,424

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE BALANCE SHEETS



(Unaudited) (In thousands)	For the Three Months Ended
	December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016
ASSETS:
Loans:
Business	$	4,818,419		$	4,777,222		$	4,827,439		$	4,906,672		$	4,731,405
Real estate — construction and land	948,043			887,596			862,479			828,017			821,048
Real estate — business	2,720,356			2,710,453			2,701,144			2,645,531			2,559,028
Real estate — personal	2,044,651			2,017,264			2,003,997			2,012,456			1,985,606
Consumer	2,100,762			2,070,398			1,997,761			1,974,894			1,978,154
Revolving home equity	394,231			395,212			399,730			405,432			415,429
Consumer credit card	756,544			739,692			731,471			747,783			757,618
Overdrafts	5,295			4,373			4,505			4,185			5,501
Total loans	13,788,301			13,602,210			13,528,526			13,524,970			13,253,789
Allowance for loan losses	(157,026		)	(156,909		)	(157,003		)	(155,328		)	(154,040		)
Net loans	13,631,275			13,445,301			13,371,523			13,369,642			13,099,749
Loans held for sale	18,158			21,227			18,341			11,972			10,765
Investment securities:
U.S. government and federal agency obligations	917,664			917,808			910,821			913,474			811,524
Government-sponsored enterprise obligations	452,104			456,668			450,362			450,489			445,544
State and municipal obligations	1,630,660			1,699,365			1,771,674			1,783,103			1,784,407
Mortgage-backed securities	3,949,933			3,718,697			3,708,124			3,760,294			3,656,695
Asset-backed securities	1,622,778			2,025,415			2,335,344			2,359,644			2,417,367
Other marketable securities	356,319			327,634			326,398			332,643			333,236
Unrealized gain on investment securities	111,930			116,873			102,935			62,986			155,818
Total available for sale securities	9,041,388			9,262,460			9,605,658			9,662,633			9,604,591
Trading securities	20,401			21,149			21,062			25,165			21,717
Non-marketable securities	97,704			102,995			101,790			100,740			105,420
Total investment securities	9,159,493			9,386,604			9,728,510			9,788,538			9,731,728
Federal funds sold and short-term securities purchased under agreements to resell	27,017			23,807			13,115			9,887			8,336
Long-term securities purchased under agreements to resell	699,999			662,490			665,655			725,001			724,998
Interest earning deposits with banks	270,222			211,219			139,061			207,845			201,367
Other assets	1,157,289			1,122,230			1,106,528			1,139,402			1,153,982
Total assets	$	24,963,453		$	24,872,878		$	25,042,733		$	25,252,287		$	24,930,925

LIABILITIES AND EQUITY:
Non-interest bearing deposits	$	7,257,102		$	7,135,703		$	7,065,849		$	7,246,698		$	7,307,407
Savings	821,908			829,197			831,038			795,695			773,304
Interest checking and money market	10,416,221			10,387,212			10,667,042			10,603,988			10,512,268
Time open & C.D.’s of less than $100,000	644,951			667,710			688,047			705,135			722,775
Time open & C.D.’s of $100,000 and over	1,119,352			1,326,290			1,510,001			1,671,125			1,333,764
Total deposits	20,259,534			20,346,112			20,761,977			21,022,641			20,649,518
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	1,625,828			1,500,987			1,363,031			1,356,316			1,284,916
Other borrowings	42,060			101,904			105,311			102,011			101,412
Total borrowings	1,667,888			1,602,891			1,468,342			1,458,327			1,386,328
Other liabilities	312,172			251,714			203,139			234,144			346,900
Total liabilities	22,239,594			22,200,717			22,433,458			22,715,112			22,382,746
Equity	2,723,859			2,672,161			2,609,275			2,537,175			2,548,179
Total liabilities and equity	$	24,963,453		$	24,872,878		$	25,042,733		$	25,252,287		$	24,930,925

COMMERCE BANCSHARES, INC. and SUBSIDIARIES

AVERAGE RATES



(Unaudited)	For the Three Months Ended
(Unaudited)	December 31, 2017		September 30, 2017		June 30, 2017		March 31, 2017		December 31, 2016
ASSETS:
Loans:
Business⁽¹⁾	3.32	%	3.25	%	3.21	%	3.02	%	2.91	%
Real estate — construction and land	4.41		4.31		4.30		3.85		3.64
Real estate — business	3.90		3.85		3.74		3.63		3.61
Real estate — personal	3.72		3.72		3.72		3.74		3.69
Consumer	4.07		4.02		3.94		3.89		3.85
Revolving home equity	4.06		4.03		3.84		3.64		3.50
Consumer credit card	11.90		12.03		11.90		11.66		11.38
Overdrafts	—		—		—		—		—
Total loans	4.18		4.13		4.06		3.92		3.85
Loans held for sale	5.55		5.36		5.75		6.64		5.77
Investment securities:
U.S. government and federal agency obligations	2.60		1.40		2.52		2.09		2.18
Government-sponsored enterprise obligations	1.69		1.61		1.59		1.58		1.54
State and municipal obligations⁽¹⁾	3.60		3.57		3.61		3.65		3.57
Mortgage-backed securities	2.38		2.36		2.35		2.38		2.40
Asset-backed securities	1.94		1.82		1.72		1.63		1.52
Other marketable securities⁽¹⁾	2.86		2.73		2.76		2.82		2.95
Total available for sale securities	2.53		2.35		2.42		2.38		2.36
Trading securities⁽¹⁾	2.63		2.51		2.70		2.77		2.40
Non-marketable securities ⁽¹⁾	8.08		6.46		11.49		21.08		5.42
Total investment securities	2.59		2.39		2.52		2.58		2.39
Federal funds sold and short-term securities purchased under agreements to resell	1.35		1.30		1.13		.94		.72
Long-term securities purchased under agreements to resell	2.36		2.28		2.22		2.12		1.86
Interest earning deposits with banks	1.18		1.24		1.04		.77		.56
Total interest earning assets	3.48		3.37		3.37		3.30		3.17

LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	.12		.12		.12		.13		.12
Interest checking and money market	.17		.16		.15		.14		.13
Time open & C.D.’s of less than $100,000	.40		.40		.39		.37		.37
Time open & C.D.’s of $100,000 and over	.88		.83		.75		.67		.60
Total interest bearing deposits	.24		.24		.23		.21		.19
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	.83		.75		.60		.46		.30
Other borrowings	3.59		3.53		3.47		3.53		3.54
Total borrowings	.90		.93		.81		.67		.54
Total interest bearing liabilities	.31	%	.31	%	.29	%	.26	%	.22	%

Net yield on interest earning assets	3.29	%	3.18	%	3.19	%	3.14	%	3.03	%

(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 Year Ended
(Unaudited) (In thousands, except per share data)	December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period	$	157,832		$	157,832		$	157,832		$	155,932		$	154,532		$	155,932		$	151,532
Provision for losses	12,654			10,704			10,758			11,128			10,400			45,244			36,318
Net charge-offs (recoveries):
Commercial portfolio:
Business	768			195			318			97			268			1,378			616
Real estate — construction and land	(87		)	(362		)	(207		)	(535		)	(882		)	(1,191		)	(3,712		)
Real estate — business	(48		)	(106		)	(10		)	(39		)	97			(203		)	(1,281		)
	633			(273		)	101			(477		)	(517		)	(16		)	(4,377		)
Personal banking portfolio:
Consumer credit card	7,724			7,631			7,750			7,148			6,506			30,253			25,430
Consumer	2,184			3,057			2,642			2,096			2,427			9,979			9,047
Overdraft	376			445			292			435			379			1,548			1,339
Real estate — personal	(56		)	(137		)	(131		)	19			(38		)	(305		)	(6		)
Revolving home equity	93			(19		)	104			7			243			185			485
	10,321			10,977			10,657			9,705			9,517			41,660			36,295
Total net loan charge-offs	10,954			10,704			10,758			9,228			9,000			41,644			31,918
Balance at end of period	$	159,532		$	157,832		$	157,832		$	157,832		$	155,932		$	159,532		$	155,932

NET CHARGE-OFF RATIOS*
Commercial portfolio:
Business	.06		%	.02		%	.03		%	.01		%	.02		%	.03		%	.01		%
Real estate — construction and land	(.04		)	(.16		)	(.10		)	(.26		)	(.43		)	(.14		)	(.48		)
Real estate — business	(.01		)	(.02		)	—			(.01		)	.02			(.01		)	(.05		)
	.03			(.01		)	—			(.02		)	(.03		)	—			(.06		)
Personal banking portfolio:
Consumer credit card	4.05			4.09			4.25			3.88			3.42			4.07			3.39
Consumer	.41			.59			.53			.43			.49			.49			.46
Overdraft	28.17			40.37			26.00			42.15			27.41			33.71			28.42
Real estate — personal	(.01		)	(.03		)	(.03		)	—			(.01		)	(.02		)	—
Revolving home equity	.09			(.02		)	.10			.01			.23			.05			.12
	.77			.83			.83			.77			.74			.80			.72
Total	.32		%	.31		%	.32		%	.28		%	.27		%	.31		%	.25		%

CREDIT QUALITY RATIOS
Non-performing assets to total loans	.09		%	.11		%	.10		%	.11		%	.11		%
Non-performing assets to total assets	.05			.06			.06			.06			.06
Allowance for loan losses to total loans	1.14			1.15			1.16			1.16			1.16

NON-PERFORMING ASSETS
Non-accrual loans:
Business	$	5,947		$	6,821		$	6,330		$	7,935		$	8,682
Real estate — construction and land	5			533			544			585			564
Real estate — business	2,736			2,346			1,833			1,764			1,634
Real estate — personal	2,461			2,863			3,504			3,368			3,403
Consumer	834			1,077			1,151			1,151			—
Total	11,983			13,640			13,362			14,803			14,283
Foreclosed real estate	681			1,063			515			387			366
Total non-performing assets	$	12,664		$	14,703		$	13,877		$	15,190		$	14,649
Loans past due 90 days and still accruing interest	$	18,127		$	16,464		$	14,630		$	14,908		$	16,396

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

COMMERCE BANCSHARES, INC.

Management Discussion of Fourth Quarter Results

December 31, 2017

For the quarter ended December 31, 2017, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $94.4 million, compared to $74.6 million in the previous quarter and $71.6 million in the same quarter last year. In the current quarter, the Company recorded contribution expense of $25.0 million for the donation of appreciated securities to a related foundation. This donation was offset by a $24.4 million gain recorded on the donated securities and the recognition of $9.3 million in tax benefits on this transaction. This contribution represents a continuation of a strategy employed in previous quarters this year. The Company also announced that as of December 31, 2017, one-time discretionary bonuses totaling $3.3 million would be paid to approximately 75% of all employees. Also, as part of the enactment of the new tax legislation, tax benefits of $6.8 million were recorded, mostly as a result of revaluing deferred tax assets and liabilities to the new lower tax rates.

Quarterly average loans increased $183.0 million over the previous quarter, while average deposits decreased $86.6 million. Compared to the previous quarter, net interest income increased $7.4 million, while non-interest income grew $2.0 million. Non-interest expense, exclusive of the foundation contribution and one-time bonuses, increased 1.8% over the prior quarter. The provision for loan losses totaled $12.7 million, up $2.0 million over the previous quarter. For the current quarter, the return on total average assets was 1.50%, the return on average common equity was 14.2%, and the efficiency ratio was 67.9%.

Balance Sheet Review

During the 4^th quarter of 2017, average loans totaled $13.8 billion, up 5.3% (annualized) over the prior quarter, and grew $541.9 million, or 4.1%, over the same period last year. Compared to the previous quarter, average construction and business loans grew $60.4 million and $41.2 million, respectively. Together, business real estate and personal real estate loans increased a combined $37.3 million, while consumer loans increased $30.4 million this quarter. Growth in construction loans was solid this quarter as advances on existing projects continued, while growth in business loans resulted from several large new borrowers. Line of credit utilization was mostly in line with the prior quarter at approximately 36% of total approved lines of credit. The increase in consumer loans was mainly due to growth of $19.1 million in patient health care loans, coupled with growth in private banking loans. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $48.0 million, compared to $64.1 million in the prior quarter.

During the 4^th quarter of 2017, total average available for sale investment securities decreased $221.1 million to $9.0 billion, at fair value. The decline in investment securities was mainly the result of lower average balances of asset-backed and municipal securities due to sales, paydowns and maturities of these securities that were not re-invested, offset by higher average balances of mortgage-backed securities. Purchases of securities this quarter totaled $669.8 million and were offset by sales, maturities and pay downs of $913.4 million. At December 31, 2017, the duration of the investment portfolio was 3.0 years, and maturities and pay downs of approximately $1.4 billion are expected to occur during the next 12 months.

Total average deposits decreased $86.6 million, or 1.7% (annualized), this quarter compared to the previous quarter. The decrease in average deposits resulted mainly from a decline in

certificates of deposit (decrease of $229.7 million), money market (decrease of $35.7 million), and personal demand (decrease of $52.0 million). These declines were offset by growth in business demand (increase of $210.1 million), and interest checking (increase of $64.8 million) deposit accounts. Compared to the previous quarter, total average consumer and private banking deposits decreased $15.7 million and $69.6 million, respectively, while commercial deposits grew slightly. The average loans to deposits ratio was 68.2% in the current quarter and 67.0% in the prior quarter. The Company’s average borrowings totaled $1.7 billion, an increase of $65.0 million over the prior quarter’s balance, mostly due to higher customer repurchase agreement balances.

Net Interest Income

Net interest income (tax equivalent) in the 4^th quarter of 2017 amounted to $197.9 million compared with $190.5 million in the previous quarter, an increase of $7.4 million. Net interest income (tax equivalent) for the current quarter increased $16.6 million, or 9.2%, compared to the 4^th quarter of last year. During the current quarter, the net yield on earning assets (tax equivalent) was 3.29%, compared with 3.18% in the previous quarter and 3.03% 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 growth in interest on loans, a slight decline in interest expense, and an increase in inflation income of $2.7 million on the Company’s treasury inflation-protected securities (TIPS). Excluding the effects of inflation income on both the current and prior quarters, the net interest margin would have increased 7 basis points.

Compared to the previous quarter, interest on loans (tax equivalent) increased $3.6 million, as a result of higher loan yields and average balances on most loan products. The average yield on the loan portfolio increased 5 basis points this quarter to 4.18%, compared to 4.13% in the previous quarter.

Interest on investment securities (tax equivalent) increased $3.2 million over the previous quarter, due to growth in inflation income mentioned above, but offset by lower average securities balances, especially in asset-backed and municipal securities. The adjustment for premium amortization expense on changing prepayment speeds for mortgage-backed securities increased interest income $655 thousand this quarter, due to a higher overall interest rate environment. Total inflation income on TIPS totaled $3.2 million in the current quarter and $447 thousand in the previous quarter. The yield on total investment securities was 2.59% in the current quarter compared to 2.39% in the prior quarter.

Interest costs on deposits remained low and totaled 24 basis points in the 4^th quarter of 2017, unchanged from the prior quarter. Interest expense on deposits declined $124 thousand this quarter compared with the previous quarter due mainly to lower average balances of certificates of deposit. Borrowing costs increased $35 thousand this quarter mostly due to higher average rates paid on customer repurchase agreements. The overall rate paid on interest-bearing liabilities was .31%, the same as in the prior quarter.

Non-Interest Income

In the 4^th quarter of 2017, total non-interest income amounted to $124.2 million, an increase of $4.7 million, or 4.0%, compared to the same period last year. Also, current quarter non-interest income increased $2.0 million compared to the prior quarter. The increase

COMMERCE BANCSHARES, INC.

Management Discussion of Fourth Quarter Results

December 31, 2017

in non-interest income over the same period last year was mainly due to growth in trust, bank card, deposit, and loan fee income, but was offset by lower swap and capital market fee income.

Total bank card fees in the current quarter increased $2.4 million, or 5.2%, over the same period last year and increased $3.2 million compared to the prior quarter. The increase over the same period last year was mainly the result of growth in corporate card fees of $3.1 million and higher debit and credit card fee income, but was offset by a decline in merchant fees of $1.0 million. As reported in prior quarters, the decline in merchant fees resulted from the loss of several large customers over the last twelve months. Total bank card fees this quarter were comprised of fees on corporate card ($24.9 million), debit card ($10.2 million), merchant ($5.9 million) and credit card ($6.7 million) transactions.

In the current quarter, trust fees increased $4.0 million, or 12.9%, over the same period last year, resulting mainly from growth in both private client and institutional trust fee income. Compared to the same period last year, deposit account fees increased $464 thousand, or 2.1%, due to growth in both deposit and overdraft fees, partially offset by lower corporate cash management fees.

During the 4^th quarter of 2017, cash sweep fees grew 20.3% to $2.0 million compared to the same period last year, and loan fees and sales grew $516 thousand, or 20.0%, on increased sales of residential mortgages. Swap fee income, however, declined $2.0 million on lower origination volume and capital market fees declined $936 thousand on lower sales volumes, mainly to correspondent bank customers. Non-interest income comprised 39.5% of the Company’s total revenue this quarter.

Investment Securities Gains and Losses

The Company recorded net securities gains of $27.2 million this quarter, compared with net losses of $3.0 million last quarter and net gains of $3.7 million in the same period last year. Net securities gains in the current quarter resulted mainly from unrealized fair value gains of $2.2 million in the Company’s private equity investment portfolio, and a gain of $24.4 million related to the Company’s contribution of appreciated securities mentioned above. The Company also sold certain equity securities for a gain of $10.1 million this quarter, offset by sales of other investment securities at a loss of $9.7 million.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $213.7 million compared to $181.3 million in the same period last year. Excluding the effects of the contribution of appreciated securities to a related foundation and the one-time discretionary bonus, non-interest expense grew 2.3%, and was up slightly over the prior quarter. The increase over the same period last year was mainly due to higher costs for salaries and benefits and the contribution of appreciated securities (expense of $25.0 million this quarter), but was offset by lower operating costs such as occupancy, data processing, and other bank card network costs.

Compared to the 4^th quarter of last year, salaries and benefits expense increased $7.1 million, or 6.5%. Salaries expense grew $6.3 million, mainly due to higher incentive compensation costs, including the discretionary bonus of $3.3 million mentioned above. Benefits expense totaled $16.0 million, reflecting an increase of 5.3% mainly due to higher medical costs. Growth in full-time salaries expense compared to the previous year resulted mainly

from increased staffing costs in commercial and consumer, information technology and other supporting business units. Full-time equivalent employees totaled 4,800 and 4,784 at December 31, 2017 and 2016, respectively.

The decline in occupancy costs of 2.2% was mainly due to demolition costs for a branch facility in the 4^th quarter of 2016, which did not recur in the current quarter. Data processing costs declined $297 thousand this quarter mainly due to lower bank card processing costs of $1.3 million offset by higher software costs. Other bank card network related costs (included in other non-interest expense) declined $1.0 million, but were offset by an increase in rewards expense of $416 thousand. The decline in total bank card related expense was mainly the result of a new vendor contract negotiated in the 3^rd quarter of 2017. Compared to the same period last year, supplies and communication and marketing costs increased $473 thousand and $506 thousand, respectively. The $25.0 million donation of appreciated securities to a related foundation this quarter increased community service costs by $24.7 million, but resulted in a pre-tax loss of $638 thousand (due to a related offsetting securities gain) and tax benefits of $9.3 million. The Company has completed this donation strategy, contributing over $32 million in 2017, which will not be repeated in future years.

Income Taxes

The effective tax rate for the Company was 17.6% in the current quarter, 30.2% in the previous quarter, and 31.09% in the 4^th quarter of 2016. Included in the current quarter were income tax benefits of $9.3 million related to the $25.0 million contribution of appreciated securities. In addition, an income tax benefit of $6.8 million was recorded, mainly to reflect the reduction in income tax rates on the Company’s deferred tax assets and liabilities as a result of the enactment of the new federal tax reform legislation in December 2017. The Company’s effective tax rate in 2018 is likely to be reduced to a range of 19-21% as a result of this new tax legislation.

Credit Quality

Net loan charge-offs in the 4^th quarter of 2017 amounted to $11.0 million, compared to $10.7 million in the prior quarter and $9.0 million in the same period last year. The ratio of annualized net loan charge-offs to total average loans was .32% in the current quarter, compared to .31% in the previous quarter and .27% in the 4^th quarter of last year. During the 4^th quarter of 2017, the Company recorded net loan charge-offs on commercial loans of $633 thousand, compared to net loan recoveries of $273 thousand in the prior quarter. Net loan charge-offs on personal banking loans totaled $10.3 million in the current quarter and $11.0 million in the previous quarter.

In the 4^th quarter of 2017, annualized net loan charge-offs on average consumer credit card loans were 4.05%, compared to 4.09% in the previous quarter and 3.42% in the same period last year. Consumer loan net charge-offs were .41% of average consumer loans in the current quarter, .59% in the prior quarter and .49% in the same quarter last year. This quarter, the provision for loan losses exceeded net loan charge-offs by $1.7 million, and at December 31, 2017, the allowance totaled $159.5 million, or 1.14% of total loans.

At December 31, 2017, total non-performing assets amounted to $12.7 million, a decrease of $2.0 million from the previous quarter.

COMMERCE BANCSHARES, INC.

Management Discussion of Fourth Quarter Results

December 31, 2017

Non-performing assets are comprised of non-accrual loans and foreclosed real estate ($12.0 million and $681 thousand, respectively). At December 31, 2017, the balance of non-accrual loans, which represented .09% of loans outstanding, included business loans of $5.9 million, business real estate loans of $2.7 million, personal real estate loans of $2.5 million and consumer loans of $834 thousand. Loans more than 90 days past due and still accruing interest totaled $18.1 million at December 31, 2017.

Other

During the 4^th quarter of 2017, the Company distributed a 5% stock dividend on its common stock. The Company paid a cash dividend of $.214 per common share and also paid an annualized 6% cash dividend on its preferred stock. The Company purchased 114,822 shares of treasury stock during the current quarter at an average price of $56.18.

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.

COMMERCE BANCSHARES INC /MO/ - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - January 18, 2018

Attached files

COMMERCE BANCSHARES INC /MO/ Reports