Commerce Bancshares, Inc. Announces Second Quarter Earnings Per Share of $.48

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.48 per share for the quarter ended June 30, 2009 compared to $.40 per share in the previous quarter and $.74 per share in the second quarter of 2008. Net income for the second quarter amounted to $37.0 million compared to $30.8 million in the previous quarter and $56.0 million in the same period last year. For the quarter, the return on average assets totaled .84% and the return on average equity was 8.9%. During the quarter, the ratio of tangible common equity to total assets increased from 8.2% to 8.9%.

For the six months ended June 30, 2009, earnings per share totaled $.88 compared to $1.58 for the first six months of last year. Net income amounted to $67.8 million in the first half of 2009 compared with $120.1 million in 2008, or a decline of $52.3 million. This decline resulted mainly from higher loan loss provisions and FDIC insurance expense in 2009.

In making this announcement, David W. Kemper, Chairman and CEO, said, "Although the overall economy remains difficult, we are pleased to report an increase in net income over the previous quarter as a result of growth in net interest income, higher core fees and good expense control. While loan balances declined this quarter, average deposits grew 5% over the previous quarter, providing an increase in overall earning assets and contributing to solid growth in net interest income. Additionally, non-interest income this quarter grew 7% compared to the previous quarter as result of double digit growth in bank card and bond trading fees, along with renewed growth in both deposit and trust fees. While non-interest expense increased 5% over the previous quarter, it included an FDIC special assessment of $8.0 million. Excluding this charge, non-interest expense would have declined compared to the first quarter of 2009.”

Mr. Kemper continued, "This quarter we continued to strengthen our balance sheet by improving liquidity, increasing capital and building our loan loss reserves. Tangible common equity increased $90 million this quarter through retained earnings, appreciation of our securities portfolio and stock issuance. During the quarter we increased our allowance for loan losses by $5.1 million to $186.0 million, representing 1.74% of outstanding loans. Non-performing assets, consisting of non-accrual loans and foreclosed property, grew by $13.0 million to $131.7 million, or 1.23% of loans. Our loan to deposit ratio totaled 82% this quarter, reflecting good overall liquidity.”

Total assets at June 30, 2009 were $17.7 billion, total loans were $11.1 billion, and total deposits were $13.7 billion.

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 over 370 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

This financial news release, including management’s discussion of second quarter results, is posted to the Company’s web site at www.commercebank.com.

COMMERCE BANCSHARES, INC.
Management Discussion of Second Quarter Results
June 30, 2009

For the quarter ended June 30, 2009, net income amounted to $37.0 million, an increase of $6.1 million over the previous quarter and a decrease of $19.0 million from the same quarter last year. For the current quarter, the return on average assets was .84%, the return on average equity was 8.9%, and the efficiency ratio was 62.2%. Compared to the previous quarter, net interest income (tax equivalent) increased by $8.4 million to $162.3 million, while non-interest income increased by $6.1 million to $98.6 million. Non-interest expense for the quarter totaled $160.0 million and included costs for an FDIC special assessment of $8.0 million. Exclusive of this item, non-interest expense would have been slightly less than in the previous quarter. Additionally in the current quarter, the Company increased its allowance for loan losses by $5.1 million.

Balance Sheet Review

During the 2^nd quarter of 2009, average loans, excluding loans held for sale, decreased $268.4 million, or 2.4%, compared to the previous quarter. Also, average loans decreased $148.7 million, or 1.4%, this quarter compared to the same period last year. The decrease in average loans compared to the previous quarter was mainly the result of lower outstanding balances in most loan categories, especially in consumer-related lending.

The average balances for business and construction loans declined by $80.8 million and $65.5 million, respectively, compared to the previous quarter. These declines were reflective of lower customer line of credit usage and continued balance reductions given the uncertain economy, especially in the construction loan portfolio. Business real estate loans increased $33.8 million, reflecting new loan originations occurring this quarter. Additionally, average balances for personal real estate, consumer and consumer credit card loans declined by $24.4 million, $81.7 million and $37.0 million, respectively, as loan pay-downs continued to exceed new loan originations for these products. The Company has reduced marketing efforts on consumer credit cards and has ceased most marine and RV lending.

Available for sale investment securities (excluding fair value adjustments) increased on average by $1.1 billion to $4.9 billion this quarter compared with the previous quarter. The majority of this increase was the result of purchases of guaranteed mortgage-backed, other asset-backed and municipal securities, which increased average balances by $406.0 million, $416.8 million and $159.2 million, respectively. Many of these purchases occurred late in the 1^st quarter and early in the 2^nd quarter.

Total average deposits increased $650.9 million, or 4.9%, during the 2^nd quarter of 2009 compared to the previous quarter, and increased $1.7 billion, or 13.5%, compared to the 2^nd quarter of 2008. Compared to the previous quarter, the increase in average deposits resulted mainly from increases in corporate demand deposits ($379.7 million) which are mostly classified as money market accounts, other premium money market accounts ($94.2 million), and other non-maturity interest bearing accounts ($223.2 million). Certificates of deposit declined on average by $51.8 million, as the Company reduced rates on jumbo certificates of deposit because of improving liquidity. The average loans to deposits ratio in the current quarter was 81.6%, compared to 87.2% in the previous quarter.

During the current quarter, the Company’s average borrowings decreased $366.1 million compared to the previous quarter. This decrease was partly the result of a $107.4 million decline in repurchase agreement balances, combined with a reduction in advances from the Federal Home Loan Bank (FHLB) of $46.3 million. Additionally, average debt outstanding under the Federal Reserve’s Term Auction Facility (TAF) declined $287.8 million and was not used as a funding source in the 2^nd quarter. Average balances of federal funds purchased increased by $75.3 million and totaled $107.2 million for the quarter.

Net Interest Income

Net interest income in the 2^nd quarter of 2009 amounted to $157.4 million, an increase of $7.4 million, or 5.0%, compared with the previous quarter and an increase of $12.7 million, or 8.7%, compared to the 2^nd quarter of last year. During the 2^nd quarter of 2009, the net yield on earning assets (tax equivalent) was 3.91%, compared with 3.83% in the previous quarter and 3.90% in the same period last year.

The increase of $7.4 million in net interest income in the 2^nd quarter of 2009 over the previous quarter was primarily the result of higher average balances of investment securities, coupled with lower rates paid on deposits. This increase was offset somewhat by lower interest income earned on loans, mostly due to lower volumes. Interest income on loans (tax equivalent) decreased by $3.4 million this quarter due to lower average balances, especially in consumer and consumer credit card loans, but was offset by an increase of $1.0 million due to higher yields on business, construction and credit card loans this quarter. Interest income on investment securities increased $8.9 million (tax equivalent) as a result of a $1.1 billion increase in average balances, mainly in mortgage-backed, other asset-backed and municipal investments, but offset by lower rates earned on many of the new investments purchased this quarter.

Interest expense on deposits declined $1.7 million in the 2^nd quarter of 2009 compared with the previous quarter as a result of lower rates paid on virtually all deposit products, but was partly offset by growth in balances, especially in money market type accounts. Interest expense on borrowings decreased $650 thousand due mainly to lower average balances of repurchase agreements, FHLB advances and borrowings under the TAF.

The overall tax equivalent yield on interest earning assets in the 2^nd quarter of 2009 decreased 2 basis points from the previous quarter to 4.91%, while the overall cost of interest bearing liabilities decreased 9 basis points to 1.12%.

Non-Interest Income

For the 2^nd quarter of 2009, total non-interest income amounted to $98.6 million, a decrease of $4.2 million compared to $102.7 million in the same period last year. Also, 2^nd quarter non-interest income increased $6.1 million, or 6.6%, compared to $92.4 million recorded in the previous quarter. Non-interest income in the 2^nd quarter of 2008 included a pre-tax gain of $6.9 million on the sale of a small branch in Kansas.

Bank card fees for the quarter increased 2.4% over the 2^nd quarter of last year, primarily due to continued growth in transaction fees earned on corporate card (growth of 18.4%) and debit card (growth of 1.6%) transactions, but continued to be negatively impacted by lower retail sales affecting both merchant and credit card fees. Bank card fees, however, grew by 10.8% over amounts recorded in the previous quarter based on higher volumes for all products. Trust fees for the quarter decreased 4.6% from the same period last year, but reflected growth of 2.6% over previous quarter results as trust asset values recovered somewhat this quarter. Deposit account fees declined 4.7% from the same period last year as a result of a 7.2% decline in overdraft fee income. Overdraft fee income, however, grew 10.3% when compared to the previous quarter, mainly due to higher overdraft volumes in the 2^nd quarter. Bond trading income for the current quarter totaled $6.2 million, an increase of 93.2% over the same period last year, due to higher sales of fixed income securities to correspondent banks and corporate customers. During the quarter, the Company sold $154.2 million of held for sale student loans and recorded a pre-tax gain of $2.1 million.

Investment Securities Gains and Losses

Net securities losses amounted to $2.8 million in the 2^nd quarter of 2009, compared to net losses of $2.2 million in the previous quarter and net gains of $1.0 million in the same quarter last year. During the current quarter, the Company recorded additional credit-related impairment losses of $794 thousand on certain non-agency guaranteed mortgage-backed securities identified as other than temporarily impaired. The noncredit-related loss on these securities, which was recorded in other comprehensive income, was $9.3 million. At June 30, 2009, the par value of these bonds identified as other than temporarily impaired totaled $102.3 million.

The current quarter also included a loss of $2.1 million relating to fair value adjustments on certain private equity investments of the Company. Minority interest related to the fair value adjustments of the private equity investments totaled $259 thousand and is included in non-controlling interest income in the income statement.

Non-Interest Expense

Non-interest expense for the current quarter amounted to $160.0 million, an increase of $7.1 million compared with amounts recorded in the previous quarter and an increase of $12.9 million compared to the same period last year. Non-interest expense for the current quarter included costs for an FDIC special assessment of $8.0 million. Exclusive of this item, non-interest expense would have declined slightly from the previous quarter and shown growth of 3.3% over the same quarter last year. Compared to the 2^nd quarter of last year, salaries and benefits expense increased $3.0 million, or 3.6%, resulting mainly from increased staffing related to several growth initiatives in previous years, and higher pension costs. Full-time equivalent employees totaled 5,181 at both June 30, 2009 and 2008, and was down approximately 1% from the 1^st quarter of 2009.

Compared with the 2^nd quarter of last year, supplies and communication and marketing costs declined 3.5% and 9.9%, respectively, while the cost for equipment was flat with last year and occupancy expense increased 2.6%. Data processing and software costs increased 6.0% as a result of higher costs for several new software and servicing systems put in place this year. FDIC insurance expense increased $12.4 million over the same quarter last year as a result of higher insurance rates and the special assessment mentioned earlier. The decline in other expense of $2.8 million was the result of initiatives to reduce operating costs in numerous areas, including travel, recruiting, professional fees and various other expenditures.

Income Taxes

The effective tax rate for the Company was 29.2% for the current quarter, compared with 30.6% in the previous quarter and 32.6% in the 2^nd quarter of 2008.

Credit Quality

Net loan charge-offs for the 2^nd quarter of 2009 amounted to $36.0 million, compared with $34.9 million in the prior quarter and $14.5 million in the 2^nd quarter of last year. The increase in net charge-offs in the 2^nd quarter of 2009 compared to the previous quarter was mainly the result of a $2.5 million increase in consumer credit card loan losses and higher losses on construction loans of $1.1 million, but offset by lower losses on business, consumer, home equity and personal real estate loans. Combined net loan charge-offs for business, business real estate and construction loans totaled $13.8 million in both the 1^st and 2^nd quarters of 2009, compared to $1.3 million in the 2^nd quarter of last year. The ratio of annualized net loan charge-offs to total average loans was 1.33% in the current quarter compared to 1.28% in the previous quarter.

For the 2^nd quarter of 2009, annualized net charge-offs on average consumer credit card loans increased to 7.60%, compared with 5.94% in the previous quarter and 4.06% in the same period last year. Consumer loan net charge-offs for the quarter amounted to 2.27% of average consumer loans, compared to 2.40% in the previous quarter and 1.09% in the same quarter last year. The provision for loan losses for the current quarter totaled $41.2 million, and was $2.0 million lower than the previous quarter. However, the Company increased the allowance for loan losses by $5.1 million this quarter to $186.0 million, or 1.74% of total loans, excluding loans held for sale. Also, the allowance for loan loss balance was 152% of total non-accrual loans. Higher levels of consumer credit card losses, coupled with growth in the Company’s loan watch list, were the main reasons for the increase in the balance of the allowance for loan losses.

Total non-performing assets amounted to $131.7 million, an increase of $13.0 million over the previous quarter, and represented 1.23% of loans outstanding. Non-performing assets are comprised of non-accrual loans ($122.6 million) and foreclosed real estate ($9.0 million). The increase in non-performing assets was mainly the result of placing an additional $7.3 million in business loans and $4.2 million in business real estate loans on non-accrual. At June 30, 2009, the balance of non-accrual loans included residential construction loans of $75.6 million, business real estate loans of $20.9 million and business loans of $18.4 million. Loans past due more than 90 days and still accruing interest totaled $40.0 million at June 30, 2009, but included $16.0 million in guaranteed student loans that are being held to maturity.

Other

The Company’s purchases of treasury stock during the current quarter were not significant and related mainly to employee stock option activity. In conjunction with the Company’s previously announced at-the-market offering, the Company issued 1,046,252 shares of its common stock during the 2^nd quarter of 2009. Gross proceeds from these sales were $36.3 million, with an average sale price of $34.66 per share. Commissions paid to the sales agent for the sale of these shares were $544 thousand. After payment of commissions and SEC, legal, and accounting fees relating to the offering during the 2^nd quarter of 2009, net proceeds totaled $35.5 million, with average net sale proceeds of $33.93 per share.

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.