Commerce Bancshares, Inc. Announces Fourth Quarter Earnings Per Share of $.60

Commerce Bancshares, Inc. (NASDAQ: CBSH) announced earnings of $.60 per share for the quarter ended December 31, 2009 compared to $.55 per share in the fourth quarter of 2008 and $.63 per share in the previous quarter of 2009. Net income for the fourth quarter amounted to $49.6 million compared to $43.8 million in the same quarter last year and $51.6 million in the previous quarter. For the quarter, the return on average assets totaled 1.09%, the return on average equity was 10.5% and the efficiency ratio was 57.4%.

For the year ended December 31, 2009, earnings per share totaled $2.07 compared to $2.36 in 2008. Net income amounted to $169.1 million in 2009 compared to $188.7 million in 2008, or a decline of 10.4%. At December 31, 2009, the ratio of tangible common equity to total assets improved to 9.7% compared to 8.3% at year end 2008.

In announcing these results, David W. Kemper, Chairman and CEO, said, "In a continued challenging environment, we were pleased to report an increase this quarter in net income of $5.8 million, or 13.2%, over the same period last year. This increase was mainly the result of revenue growth of 11% comprised of both net interest income and non-interest income. Net interest income grew by $8.2 million over the same quarter last year while the margin declined slightly to 3.95% compared to 4.06% last year. The increase in non-interest income of $18.2 million resulted from higher fees earned on student lending activities and bankcard transactions. Non-interest expense remained well controlled all year even though FDIC costs increased $4.9 million in the fourth quarter compared to last year and $25.3 million in the full year 2009 compared to 2008. Loan balances continued to decline this quarter as weak demand persisted, while average deposits increased 2.7%, or $376.7 million, over the previous quarter.”

Further, Mr. Kemper noted, "We continued to strengthen our balance sheet this quarter through growth in both capital and liquidity. Our ratio of tangible common equity to assets increased to 9.7% this quarter while our loan to deposit ratio totaled 73.6%, reflecting strong capital and liquidity positions among our banking peers. Also, we increased our allowance for loan losses this quarter by $4.0 million, but reduced non-performing assets by $12.6 million, or 10%. Net loan charge-offs for the quarter totaled $37.0 million, an increase of $6.1 million over the previous quarter mainly due to continued high levels of residential development and consumer loan losses.”

Total assets at December 31, 2009 were $18.1 billion, total loans were $10.5 billion, and total deposits were $14.2 billion. At December 31, 2009 the allowance for loan losses totaled $194.5 million, representing 1.92% of outstanding loans. Non-performing assets (consisting of non-accrual loans and foreclosed property) totaled $116.7 million at December 31, 2009 compared to $129.2 million at September 30, 2009. The ratio of the allowance for loan losses to non-performing loans increased to 182%.

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.

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

COMMERCE BANCSHARES, INC.
Management Discussion of Fourth Quarter Results
December 31, 2009

For the quarter ended December 31, 2009, net income amounted to $49.6 million, an increase of $5.8 million over the same quarter last year but a decline of $2.0 million compared to the previous quarter. For the current quarter, the return on average assets was 1.09%, the return on average equity was 10.5%, and the efficiency ratio was 57.4%. Compared to the same quarter last year, net interest income (tax equivalent) increased by $8.5 million to $169.5 million, while non-interest income increased by $18.2 million to $103.5 million. Non-interest expense for the quarter totaled $154.7 million, an increase of $11.0 million over the same period last year and included higher FDIC costs of $4.9 million. The provision for loan losses totaled $41.0 million and was slightly less than the amount recorded in the same quarter last year.

Balance Sheet Review

During the 4^th quarter of 2009, average loans, excluding loans held for sale, decreased $277.6 million, or 2.7%, compared to the previous quarter. Also, average loans decreased $778.5 million, or 7.1%, this quarter compared to the same period last year. Period end loans in the current quarter, excluding those held for sale, were down $137.4 million compared to the previous quarter and reflected several larger new loans recorded late in the 4^th quarter 2009 and not fully reflected in the averages noted above. The decrease in average loans compared to the previous quarter was mainly the result of lower business loan totals, which declined $152.8 million, coupled with declining balances in most other categories, including personal real estate, business real estate and consumer loans. Consumer credit card loans grew 2.8% this quarter compared to the previous quarter mainly due to higher usage during the holiday season.

The decline in average business loans continued to reflect lower line of credit usage, lower demand, and pay-downs by business loan customers. Average construction and business real estate loans declined by $3.8 million and $34.3 million, respectively, compared to the previous quarter, and were reflective of continued uncertain economic conditions in the real estate markets and lower overall demand. Average balances of personal real estate and consumer loans declined by $31.1 million and $65.5 million, respectively, as loan pay-downs continued to exceed new loan originations for these products. Also, the Company has ceased most marine and RV lending in the consumer loan portfolio. The average balance of loans held for sale (comprised mostly of student loans) increased $28.5 million this quarter as the Company originated new student loans totaling $224.2 million in the 3^rd and 4^th quarters of 2009. Student loans totaling $38.9 million were sold during the current quarter.

Total available for sale investment securities (excluding fair value adjustments) averaged $6.1 billion this quarter, an increase of $615.1 million compared with the previous quarter. The majority of this increase was the result of purchases of $109.2 million in mortgage-backed securities, $422.0 million in other asset-backed securities, $168.6 million in U.S. Treasury inflation-protected securities (TIPS) and $19.9 million in municipal securities. Additionally during the 4^th quarter, the Company sold $38.9 million par value of non-agency mortgage-backed securities for a loss of $9.9 million and reversed credit-related impairment loss reserves of $1.1 million. Also, certain corporate bonds and longer-maturity TIPS, with a total par value of $137.4 million, were sold for a gain of $10.2 million.

Total average deposits increased $376.7 million, or 2.7%, during the 4^th quarter of 2009 compared to the previous quarter, and increased $1.8 billion, or 14.5%, compared to the 4^th quarter of 2008. Compared to the previous quarter, the increase in average deposits resulted mainly from an increase in business demand (up $266.1 million), corporate money market (up $335.3 million) and premium money market (up $181.0 million). Certificates of deposit (CD’s) in total declined $439.0 million, of which $94.4 million was related to certain jumbo short-term corporate CD’s. The average loans to deposits ratio in the current quarter was 73.6%, compared to 77.4% in the previous quarter.

During the current quarter, the Company’s average borrowings decreased $18.0 million compared to the previous quarter. This decrease was the result of a $58.2 million reduction in average advances from the Federal Home Loan Bank (FHLB) combined with a $42.0 million increase in average federal funds purchased and repurchase agreement balances.

Net Interest Income

Net interest income (tax equivalent) in the 4^th quarter of 2009 amounted to $169.5 million, an increase of $1.1 million compared with the previous quarter and an increase of $8.5 million compared to the 4^th quarter of last year. During the 4^th quarter of 2009, the net yield on earning assets (tax equivalent) was 3.95%, compared with 4.02% in the previous quarter and 4.06% in the same period last year.

The increase of $1.1 million in net interest income (tax equivalent) in the 4^th quarter of 2009 over the previous quarter was primarily the result of lower rates paid on deposit accounts (mainly CD’s) coupled with higher average balances on investment securities. The increase was partly offset by lower interest earned on loans due to lower rates and volumes, and lower rates earned on investment securities. Interest income on loans (tax equivalent) decreased by $4.7 million this quarter mainly due to lower average balances (discussed earlier), especially in business and consumer loans. Also, while credit card average balances increased $20.4 million, rates earned on these loans declined 80 basis points. Interest income on investment securities decreased $1.8 million (tax equivalent) as rates earned on investment securities declined 56 basis points to an average yield of 4.02%, but were partly offset by higher average balances. At December 31, 2009, the Company held TIPS with a book value of $425.3 million. During the current quarter, inflation-adjusted income earned on these bonds amounted to $1.4 million compared to $2.4 million earned in the previous quarter.

Interest expense on deposits declined $7.0 million in the 4^th quarter of 2009 compared with the previous quarter as a result of lower rates paid on virtually all deposit products, coupled with lower CD balances which carry higher interest rates. Interest expense on borrowings decreased $636 thousand, due mainly to lower average balances of FHLB advances.

The tax equivalent yield on interest earning assets in the 4^th quarter of 2009 decreased 27 basis points from the previous quarter to 4.66%, while the overall cost of interest bearing liabilities decreased 20 basis points to .82%.

Non-Interest Income

For the 4^th quarter of 2009, total non-interest income amounted to $103.5 million, an increase of $18.2 million compared to $85.2 million in the same period last year. Also, current quarter non-interest income increased $1.3 million compared to $102.1 million recorded in the previous quarter.

Bank card fees for the quarter increased 16.4% over the 4^th quarter of last year, primarily due to continued growth in transaction fees earned on corporate card (growth of 30.6%) merchant (growth of 24.5%) and debit card (growth of 10.7%) transactions. Trust fees for the quarter were virtually flat with the same period last year and with the previous quarter, reflecting the effects of low interest rates on money market income held in trust accounts. Deposit account fees decreased 4.0% from the same period last year, as overdraft fees were down 9.6%, but were partly offset by a 7.6% increase in corporate cash management fees. Bond trading income for the current quarter totaled $4.9 million, an increase of 3.0% 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 $38.9 million of student loans held for sale and recorded a pre-tax gain of $2.1 million. Additionally, impairment reserves totaling $3.8 million on certain held for sale student loans were reversed into income. These reserves, which had originally been established because of liquidity concerns in the 4^th quarter of 2008 and totaled $9.4 million at December 31, 2008, have now been largely reversed through sales of the related loans in 2009 or the adjustment noted above.

Investment Securities Gains and Losses

Net securities losses amounted to $1.3 million in the 4^th quarter of 2009, compared to net losses of $945 thousand in the previous quarter and net gains of $4.8 million in the same quarter last year. During the current quarter, the Company recorded additional credit-related impairment losses of $808 thousand on certain non-agency guaranteed mortgage-backed securities identified as other than temporarily impaired. However, cumulative impairment losses of $1.1 million were reversed on certain non-agency guaranteed mortgage-backed securities sold this quarter. Credit-related impairment losses of $1.5 million were recorded in the previous quarter. As noted above, the Company sold certain non-agency guaranteed mortgage-backed securities, along with TIPS and certain corporate bonds, and recorded a net pre-tax gain of $281 thousand. At December 31, 2009, the par value of non-agency guaranteed mortgage-backed securities identified as other than temporarily impaired totaled $171.6 million, compared to $137.8 million at September 30, 2009.

The current quarter also included pre-tax losses of $1.9 million which related to fair value adjustments on certain private equity investments of the Company. Minority interest related to these losses totaled $229 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 $154.7 million, virtually flat with amounts recorded in the previous quarter and an increase of $11.0 million, or 7.6%, compared to the same period last year. The increase over last year was related to significantly higher FDIC costs. Compared to the 4^th quarter of last year, salaries and benefits expense increased $1.9 million, or 2.3%, resulting mainly from higher medical and pension costs. Salary costs this quarter declined slightly from amounts recorded in the previous quarter. Full-time equivalent employees totaled 5,125 and 5,217 at December 31, 2009 and 2008, respectively.

Compared with the 4^th quarter of last year, supplies and communication costs declined 18.5% and occupancy costs were down 2.7%. Marketing costs were also down 4.7% from the same quarter last year, while data processing and software costs increased 17.3% as a result of higher costs for bankcard processing fees (related to higher volumes processed) and several new software and servicing systems put in place this year. FDIC insurance expense increased $4.9 million over the same quarter last year due mainly to higher insurance rates assessed and growth in deposits. Included in non-interest expense in the 4^th quarter last year was a reduction of $3.7 million in certain Visa, Inc. indemnification costs, which did not re-occur in the current quarter.

Income Taxes

The effective tax rate for the Company was 30.2% for the current quarter, compared with 31.2% in the previous quarter and 28.8% in the 4^th quarter of 2008.

Credit Quality

Net loan charge-offs for the 4^th quarter of 2009 amounted to $37.0 million, compared with $30.9 million in the prior quarter and $24.7 million in the 4^th quarter of last year. The $6.1 million increase in net loan charge-offs in the 4^th quarter of 2009 compared to the previous quarter was mainly the result of an increase in losses on construction loans of $5.6 million, coupled with higher losses on consumer banking and business real estate loans of $1.3 million and $933 thousand, respectively. Consumer credit card losses were only slightly higher than in the previous quarter. Net loan charge-offs on business loans decreased by $2.6 million from the previous quarter. The ratio of annualized net loan charge-offs to total average loans was 1.44% in the current quarter compared to 1.17% in the previous quarter.

For the 4^th quarter of 2009, annualized net charge-offs on average consumer credit card loans amounted to 6.74%, compared with 6.85% in the previous quarter and 4.48% in the same period last year. Consumer loan net charge-offs for the quarter amounted to 2.30% of average consumer loans, compared to 1.82% in the previous quarter and 1.64% in the same quarter last year. The provision for loan losses for the current quarter totaled $41.0 million, and was $5.6 million higher than the previous quarter. However, the Company increased the allowance for loan losses by $4.0 million this quarter to $194.5 million, or 1.92% of total loans, excluding loans held for sale. The allowance for loan loss balance was 182% of total non-accrual loans.

At December 31, 2009, total non-performing assets amounted to $116.7 million, a decrease of $12.6 million from the previous quarter, and represented 1.15% of loans outstanding. Non-performing assets are comprised of non-accrual loans ($106.6 million) and foreclosed real estate ($10.1 million). At December 31, 2009, the balance of non-accrual loans included construction and land loans of $62.5 million, business real estate loans of $21.8 million and business loans of $12.9 million. Loans past due more than 90 days and still accruing interest totaled $42.6 million at December 31, 2009, but included $13.8 million in federally guaranteed student loans that the Company intends to hold 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.

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.