[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The unaudited statements detail the company's financial position, performance, and cash flows for Q1 2019 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :---------------------- | :------------ | :------------ | | Total Assets | $25,033,471 | $25,463,842 | | Net Loans | $13,960,040 | $13,980,366 | | Total Investment Securities | $8,792,515 | $8,698,666 | | Total Deposits | $19,974,353 | $20,323,659 | | Total Liabilities | $21,990,258 | $22,526,693 | | Total Equity | $3,043,213 | $2,937,149 | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Consolidated Statements of Income Highlights (Three Months Ended March 31, In thousands, except per share data) | Metric | 2019 | 2018 | Change (YoY) | % Change (YoY) | | :----------------------------------------- | :------------ | :------------ | :----------- | :------------- | | Total Interest Income | $227,865 | $205,995 | $21,870 | 10.6% | | Total Interest Expense | $24,377 | $13,103 | $11,274 | 86.0% | | Net Interest Income | $203,488 | $192,892 | $10,596 | 5.5% | | Provision for Loan Losses | $12,463 | $10,396 | $2,067 | 19.9% | | Total Non-Interest Income | $121,240 | $119,690 | $1,550 | 1.3% | | Investment Securities Gains (Losses), Net | $(925) | $5,410 | $(6,335) | N.M. | | Total Non-Interest Expense | $191,425 | $182,277 | $9,148 | 5.0% | | Net Income Attributable to Commerce Bancshares, Inc. | $97,138 | $100,984 | $(3,846) | (3.8)% | | Net Income Available to Common Shareholders | $94,888 | $98,734 | $(3,846) | (3.9)% | | Net Income Per Common Share — Basic | $0.85 | $0.88 | $(0.03) | (3.4)% | | Net Income Per Common Share — Diluted | $0.85 | $0.88 | $(0.03) | (3.4)% | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Consolidated Statements of Comprehensive Income Highlights (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | Change (YoY) | % Change (YoY) | | :--------------------------------------------- | :--------- | :--------- | :----------- | :------------- | | Net Income | $97,055 | $102,061 | $(5,006) | (4.9)% | | Net Unrealized Gains (Losses) on Other Securities | $73,441 | $(73,721) | $147,162 | N.M. | | Other Comprehensive Income (Loss) | $76,650 | $(73,283) | $149,933 | N.M. | | Comprehensive Income Attributable to Commerce Bancshares, Inc. | $173,788 | $27,701 | $146,087 | 527.4% | [Consolidated Statements of Changes in Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Equity) Consolidated Statements of Changes in Equity Highlights (Three Months Ended March 31, In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :--------------------------------------------- | :------------ | :------------ | | Total Commerce Bancshares, Inc. Stockholders' Equity | $3,037,755 | $2,931,298 | | Net Income | $97,138 | N/A | | Other Comprehensive Income | $76,650 | N/A | | Purchases of Treasury Stock | $(39,699) | N/A | | Cash Dividends on Common Stock | $(28,858) | N/A | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, In thousands) | Activity | 2019 | 2018 | Change (YoY) | | :------------------------------------------- | :------------ | :------------ | :----------- | | Net Cash Provided by Operating Activities | $142,181 | $143,989 | $(1,808) | | Net Cash Provided by (Used in) Investing Activities | $(31,322) | $283,362 | $(314,684) | | Net Cash Used in Financing Activities | $(713,667) | $(366,757) | $(346,910) | | Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $(602,808) | $60,594 | $(663,402) | | Cash, Cash Equivalents and Restricted Cash at March 31 | $606,432 | $584,946 | $21,486 | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed disclosures explain accounting principles and provide further context for the consolidated financial statements [Note 1. Principles of Consolidation and Presentation](index=11&type=section&id=Note%201.%20Principles%20of%20Consolidation%20and%20Presentation) - The consolidated financial statements are unaudited and prepared in accordance with GAAP for interim financial information, requiring management estimates and assumptions[27](index=27&type=chunk)[28](index=28&type=chunk) [Note 2. Loans and Allowance for Loan Losses](index=11&type=section&id=Note%202.%20Loans%20and%20Allowance%20for%20Loan%20Losses) The loan portfolio totaled **$14.12 billion** with an allowance for loan losses of **$160.7 million** at March 31, 2019 [Major Classifications of Loan Portfolio](index=11&type=section&id=Major%20Classifications%20of%20Loan%20Portfolio) Major Loan Classifications (In thousands) | Loan Type | Mar. 31, 2019 | Dec. 31, 2018 | | :-------------------------- | :------------ | :------------ | | Commercial: Business | $5,175,541 | $5,106,427 | | Real estate – business | $2,859,614 | $2,875,788 | | Personal Banking: Real estate – personal | $2,125,087 | $2,127,083 | | Consumer | $1,893,212 | $1,955,572 | | Total Loans | $14,120,722 | $14,140,298 | - At March 31, 2019, **$3.8 billion** in loans were pledged at the Federal Home Loan Bank and **$1.6 billion** at the Federal Reserve Bank as collateral[29](index=29&type=chunk) [Allowance for Loan Losses Activity](index=12&type=section&id=Allowance%20for%20Loan%20Losses%20Activity) Allowance for Loan Losses Activity (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :-------------------------- | :------------ | :------------ | | Balance at January 1 | $159,932 | $159,532 | | Provision | $12,463 | $10,396 | | Net Loan Charge-offs | $11,713 | $10,396 | | Balance at March 31 | $160,682 | $159,532 | [Impaired Loans](index=12&type=section&id=Impaired%20Loans) Impaired Loans (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :---------------------- | :------------ | :------------ | | Non-accrual loans | $12,167 | $12,536 | | Restructured loans (accruing) | $72,005 | $66,080 | | Total Impaired Loans | $84,172 | $78,616 | Interest Income Recognized on Impaired Loans (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :----- | :------- | :------- | | Total | $1,427 | $1,218 | [Delinquent and Non-Accrual Loans](index=14&type=section&id=Delinquent%20and%20Non-Accrual%20Loans) Delinquent and Non-Accrual Loans (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | 30 – 89 Days Past Due | $70,732 | $72,687 | | 90 Days Past Due and Accruing | $16,655 | $16,658 | | Non-accrual | $12,167 | $12,536 | | Total Loans | $14,120,722 | $14,140,298 | [Credit Quality](index=14&type=section&id=Credit%20Quality) - Commercial loan portfolio credit quality is categorized into Pass (**$8.59 billion**), Special Mention (**$216.1 million**), Substandard (**$141.7 million**), and Non-accrual (**$10.3 million**) at March 31, 2019[50](index=50&type=chunk) Personal Banking Loans by FICO Score (% of Loan Category) - March 31, 2019 | FICO Score | Real Estate - Personal | Consumer | Revolving Home Equity | Consumer Credit Card | | :----------- | :--------------------- | :------- | :-------------------- | :------------------- | | Under 600 | 1.1% | 3.4% | 1.2% | 5.4% | | 600 - 659 | 1.7% | 5.3% | 1.9% | 14.0% | | 660 - 719 | 9.9% | 18.0% | 9.5% | 35.6% | | 720 - 779 | 25.3% | 24.3% | 22.8% | 26.3% | | 780 and over | 62.0% | 49.0% | 64.6% | 18.7% | [Troubled Debt Restructurings](index=18&type=section&id=Troubled%20Debt%20Restructurings) Troubled Debt Restructurings (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | Accruing restructured loans: Commercial | $56,524 | $50,904 | | Accruing restructured loans: Assistance programs | $7,960 | $7,410 | | Non-accrual loans | $9,352 | $9,759 | | Total Troubled Debt Restructurings | $81,357 | $75,839 | - Modifications to loans under debt management and assistance programs are estimated to decrease interest income by approximately **$1.0 million** annually, pre-tax[56](index=56&type=chunk) [Loans Held for Sale](index=19&type=section&id=Loans%20Held%20for%20Sale) - Loans held for sale include **$8.9 million** in residential mortgage loans (fair value) and **$11.2 million** in student loan originations (lower of cost or fair value) at March 31, 2019[63](index=63&type=chunk)[64](index=64&type=chunk) - **None** of the loans held for sale were on non-accrual status or 90 days past due at March 31, 2019[65](index=65&type=chunk) [Foreclosed Real Estate/Repossessed Assets](index=19&type=section&id=Foreclosed%20Real%20Estate%2FRopossessed%20Assets) Foreclosed Real Estate and Repossessed Assets (In thousands) | Asset Type | Mar. 31, 2019 | Dec. 31, 2018 | | :------------------------- | :------------ | :------------ | | Foreclosed Real Estate | $737 | $1,400 | | Repossessed Personal Property | $2,600 | $2,000 | [Note 3. Investment Securities](index=19&type=section&id=Note%203.%20Investment%20Securities) Total investment securities increased to **$8.79 billion**, primarily driven by available for sale debt securities [Investment Securities Composition](index=19&type=section&id=Investment%20Securities%20Composition) Investment Securities Composition (In thousands) | Security Type | Mar. 31, 2019 | Dec. 31, 2018 | | :-------------------------------- | :------------ | :------------ | | Available for sale debt securities | $8,627,890 | $8,538,041 | | Trading debt securities | $30,427 | $27,059 | | Equity securities | $4,694 | $4,409 | | Other (FRB, FHLB, Private Equity) | $129,504 | $129,157 | | Total Investment Securities | $8,792,515 | $8,698,666 | [Available for Sale Debt Securities by Maturity](index=20&type=section&id=Available%20for%20Sale%20Debt%20Securities%20by%20Maturity) - Mortgage and asset-backed securities constitute the largest portion of available for sale debt securities, totaling **$5.94 billion** at March 31, 2019[73](index=73&type=chunk) - The portfolio includes **$446.9 million** in U.S. Treasury inflation-protected securities (TIPS) and **$14.5 million** in auction rate securities[73](index=73&type=chunk) [Unrealized Gains and Losses on AFS Debt Securities](index=21&type=section&id=Unrealized%20Gains%20and%20Losses%20on%20AFS%20Debt%20Securities) Unrealized Gains and Losses on AFS Debt Securities (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | Gross Unrealized Gains | $74,578 | $35,266 | | Gross Unrealized Losses | $(41,161) | $(99,824) | | Net Unrealized Gain (Loss) | $33,417 | $(64,558) | - The total amount of unrealized loss on available for sale securities **decreased by $58.7 million** from December 31, 2018, mainly due to a declining interest rate environment[82](index=82&type=chunk) [Other-Than-Temporary Impairment (OTTI)](index=21&type=section&id=Other-Than-Temporary%20Impairment%20(OTTI)) - Cumulative credit-related OTTI on non-agency mortgage-backed securities totaled **$14.1 million** at March 31, 2019[77](index=77&type=chunk) - **No impairment losses** on these securities were recognized in the first three months of 2019, compared to **$68 thousand** in the same period last year[242](index=242&type=chunk) [Proceeds from Sales & Gains/Losses](index=23&type=section&id=Proceeds%20from%20Sales%20%26%20Gains%2FLosses) Investment Securities Gains (Losses), Net (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :---------------------------------------- | :-------- | :-------- | | Gains realized on sales (AFS debt securities) | $1,386 | $212 | | Losses realized on sales (AFS debt securities) | $(692) | $0 | | Fair value adjustments, net (Private equity) | $(1,842) | $4,305 | | Total Investment Securities Gains (Losses), Net | $(925) | $5,410 | [Pledged Securities](index=23&type=section&id=Pledged%20Securities) - At March 31, 2019, **$4.0 billion** in fair value of securities were pledged to secure public fund deposits, repurchase agreements, trust funds, and borrowings at the FRB and FHLB[87](index=87&type=chunk) [Note 4. Goodwill and Other Intangible Assets](index=24&type=section&id=Note%204.%20Goodwill%20and%20Other%20Intangible%20Assets) Net other intangible assets decreased slightly to **$8.5 million** due to amortization, while goodwill remained stable at **$138.9 million** Goodwill and Other Intangible Assets (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :-------------------------- | :------------ | :------------ | | Goodwill | $138,921 | $138,921 | | Core deposit premium (net) | $2,170 | $2,316 | | Mortgage servicing rights (net) | $6,341 | $6,478 | | Total Other Intangible Assets, Net | $8,511 | $8,794 | - Aggregate amortization expense on intangible assets was **$342 thousand** for Q1 2019, with estimated annual amortization for 2019 at **$1.38 million**[91](index=91&type=chunk)[92](index=92&type=chunk) [Note 5. Guarantees](index=24&type=section&id=Note%205.%20Guarantees) The Company's maximum potential future payment for financial guarantees, primarily standby letters of credit, was **$325.6 million** - Contractual amount of standby letters of credit, representing maximum potential future payments, was **$325.6 million** at March 31, 2019[95](index=95&type=chunk) - The fair value of guarantee liabilities for credit risk participation agreements (RPAs) was **$110 thousand** at March 31, 2019, with a notional amount of underlying swaps at **$86.6 million**[98](index=98&type=chunk) [Note 6. Leases](index=26&type=section&id=Note%206.%20Leases) The adoption of a new lease standard resulted in recognizing **$27.1 million** in right-of-use assets and **$27.8 million** in lease liabilities [Lessee Information](index=26&type=section&id=Lessee%20Information) Lessee Operating Lease Information (March 31, 2019, In thousands) | Metric | Amount | | :----------------------------------- | :---------- | | Right-of-use asset | $27,100 | | Lease liability | $27,800 | | Total lease cost (Q1 2019) | $1,800 | | Weighted-average remaining lease term | 12.1 years | | Weighted-average discount rate | 3.76% | [Lessor Information](index=27&type=section&id=Lessor%20Information) Lessor Lease Income (Three Months Ended March 31, 2019, In thousands) | Lease Type | Income | | :----------------------------- | :-------- | | Direct financing and sales-type leases | $5,862 | | Operating leases | $1,906 | | Total Lease Income | $7,768 | - Net investments in direct financing and sales-type leases totaled **$765.5 million** at March 31, 2019[111](index=111&type=chunk) [Note 7. Pension](index=28&type=section&id=Note%207.%20Pension) Net periodic pension cost increased to **$546 thousand** for Q1 2019 from **$190 thousand** in Q1 2018 Net Periodic Pension Cost (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :--------------------------- | :----- | :----- | | Net periodic pension cost | $546 | $190 | - All benefits under the defined benefit pension plan have been frozen since January 1, 2011, and **no funding contributions** were made in Q1 2019[116](index=116&type=chunk) [Note 8. Common Stock](index=29&type=section&id=Note%208.%20Common%20Stock) Basic and diluted EPS were **$0.85** for Q1 2019, and authorized common shares increased from **120 million to 140 million** Income Per Common Share (Three Months Ended March 31, In thousands, except per share data) | Metric | 2019 | 2018 | | :----------------------------------- | :------ | :------ | | Basic income per common share | $0.85 | $0.88 | | Diluted income per common share | $0.85 | $0.88 | | Weighted average common shares outstanding | 110,011 | 110,916 | - Authorized common stock shares **increased from 120 million to 140 million** in April 2019[121](index=121&type=chunk) [Note 9. Accumulated Other Comprehensive Income](index=30&type=section&id=Note%209.%20Accumulated%20Other%20Comprehensive%20Income) AOCI shifted from a loss of **$64.7 million** to a gain of **$12.0 million**, driven by unrealized gains on securities Accumulated Other Comprehensive Income (Loss) (In thousands) | Metric | Jan. 1, 2019 | Mar. 31, 2019 | | :--------------------------------------------- | :----------- | :------------ | | Balance Accumulated Other Comprehensive Income (Loss) | $(64,669) | $11,981 | | Current period other comprehensive income, net of tax | N/A | $76,650 | - The reclassification of tax rate changes (ASU 2018-02) and unrealized gains on equity securities (ASU 2016-01) impacted AOCI in prior periods[126](index=126&type=chunk)[127](index=127&type=chunk) [Note 10. Segments](index=31&type=section&id=Note%2010.%20Segments) The Wealth segment reported the strongest pre-tax income growth (**16.1%**), while the Commercial segment's income declined - The Consumer segment offers various consumer loan and deposit products, including indirect and other consumer loan financing, and debit/credit card services[130](index=130&type=chunk) - The Commercial segment provides corporate lending, leasing, international services, business/governmental deposit products, and commercial cash management[130](index=130&type=chunk) - The Wealth segment offers trust and estate planning, investment management, and brokerage services, along with private banking[130](index=130&type=chunk) [Note 11. Derivative Instruments](index=32&type=section&id=Note%2011.%20Derivative%20Instruments) The fair value of derivative assets increased to **$51.7 million**, primarily from interest rate swaps and floors [Notional Amounts](index=32&type=section&id=Notional%20Amounts) Derivative Instruments Notional Amounts (In thousands) | Instrument Type | Mar. 31, 2019 | Dec. 31, 2018 | | :------------------------------- | :------------ | :------------ | | Interest rate swaps | $2,006,280 | $2,006,280 | | Interest rate floors | $1,000,000 | $1,000,000 | | Credit risk participation agreements | $86,600 | $143,460 | | Total Notional Amount | $3,254,921 | $3,254,921 | [Fair Values](index=33&type=section&id=Fair%20Values) Fair Values of Derivative Instruments (In thousands) | Metric | Mar. 31, 2019 (Asset) | Dec. 31, 2018 (Asset) | Mar. 31, 2019 (Liability) | Dec. 31, 2018 (Liability) | | :----------------------------------- | :-------------------- | :-------------------- | :------------------------ | :------------------------ | | Derivatives designated as hedging instruments: Interest rate floors | $32,058 | $29,031 | $0 | $0 | | Derivatives not designated as hedging instruments: Interest rate swaps | $18,641 | $11,537 | $(9,970) | $(13,110) | | Total Derivatives | $51,691 | $41,210 | $(10,300) | $(13,421) | [Effects on Income Statement](index=34&type=section&id=Effects%20on%20Income%20Statement) - Interest rate floors, designated as cash flow hedges, recognized **$3.0 million** in OCI for Q1 2019[151](index=151&type=chunk) - Derivatives not designated as hedging instruments generated a net gain of **$384 thousand** in income for Q1 2019, down from **$1.2 million** in Q1 2018[151](index=151&type=chunk) [Balance Sheet Offsetting](index=34&type=section&id=Balance%20Sheet%20Offsetting) - At March 31, 2019, positive fair values of cleared swaps were reduced by **$3.8 million** and negative fair values by **$12.4 million** due to collateral offsetting[147](index=147&type=chunk) [Note 12. Resale and Repurchase Agreements](index=35&type=section&id=Note%2012.%20Resale%20and%20Repurchase%20Agreements) Net resale agreements were **$700.0 million** and net repurchase agreements were **$1.46 billion** at March 31, 2019 Resale and Repurchase Agreements (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------------- | :------------ | :------------ | | Total resale agreements, net | $700,000 | $700,000 | | Total repurchase agreements, net | $1,460,376 | $1,943,219 | | Collateral swaps (offset in balance sheet) | $300,000 | $450,000 | - Repurchase agreements are primarily secured by agency mortgage-backed securities (**$990.0 million**) and U.S. government and federal agency obligations (**$382.6 million**) at March 31, 2019[161](index=161&type=chunk) [Note 13. Stock-Based Compensation](index=37&type=section&id=Note%2013.%20Stock-Based%20Compensation) Stock-based compensation expense was **$3.5 million** for Q1 2019, with **1.06 million** nonvested stock awards outstanding - Stock-based compensation expense was **$3.5 million** for Q1 2019[164](index=164&type=chunk) Nonvested Share Awards Activity (Three Months Ended March 31, 2019) | Metric | Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :---------- | :------------------------------------- | | Nonvested at January 1, 2019 | 1,180,940 | $43.24 | | Granted | 178,446 | $61.87 | | Vested | (291,519) | $32.68 | | Nonvested at March 31, 2019 | 1,064,621 | $49.23 | - SARs outstanding at March 31, 2019, totaled **1.16 million** with a weighted average exercise price of **$44.19** and an aggregate intrinsic value of **$16.7 million**[168](index=168&type=chunk) [Note 14. Revenue from Contracts with Customers](index=37&type=section&id=Note%2014.%20Revenue%20from%20Contracts%20with%20Customers) Non-interest income from customer contracts totaled **$112.0 million** for Q1 2019, led by bank card and trust fees - Approximately **63%** of the Company's total revenue for Q1 2019 was net interest income, not subject to ASU 2014-09[169](index=169&type=chunk) Non-Interest Income from Contracts with Customers (Three Months Ended March 31, In thousands) | Revenue Category | 2019 | 2018 | | :------------------------------- | :--------- | :--------- | | Bank card transaction fees | $39,644 | $41,453 | | Trust fees | $37,256 | $36,062 | | Deposit account charges and other fees | $23,018 | $22,982 | | Total non-interest income from contracts with customers | $112,037 | $111,576 | [Note 15. Fair Value Measurements](index=38&type=section&id=Note%2015.%20Fair%20Value%20Measurements) Assets measured at fair value on a recurring basis totaled **$8.82 billion**, with the majority classified as Level 2 [Recurring Fair Value Measurements](index=39&type=section&id=Recurring%20Fair%20Value%20Measurements) Assets Measured at Fair Value on a Recurring Basis (March 31, 2019, In thousands) | Asset Type | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :--------------- | :--------- | :----------- | :--------- | | Residential mortgage loans held for sale | $8,908 | $0 | $8,908 | $0 | | Available for sale debt securities | $8,627,890 | $877,921 | $7,735,441 | $14,529 | | Private equity investments | $85,877 | $0 | $0 | $85,877 | | Derivatives | $51,691 | $0 | $50,776 | $915 | | Total Assets | $8,822,498 | $895,626 | $7,825,551 | $101,321 | [Level 3 Inputs](index=42&type=section&id=Level%203%20Inputs) - Auction rate securities (**$14.5 million**) and private equity investments (**$85.9 million**) are significant Level 3 measurements[191](index=191&type=chunk) Quantitative Information about Level 3 Fair Value Measurements - Unobservable Inputs | Valuation Technique | Unobservable Input | Range | Weighted Average | | :------------------ | :--------------------------- | :---------- | :--------------- | | Auction rate securities (Discounted cash flow) | Estimated market recovery period | 4 - 5 years | N/A | | Auction rate securities (Discounted cash flow) | Estimated market rate | 3.4% - 4.3% | N/A | | Private equity investments (Market comparable companies) | EBITDA multiple | 4.0 - 6.0 | N/A | | Mortgage loan commitments (Discounted cash flow) | Probability of funding | 50.8% - 99.1% | 79.3% | [Nonrecurring Fair Value Measurements](index=42&type=section&id=Nonrecurring%20Fair%20Value%20Measurements) Nonrecurring Fair Value Adjustments (Three Months Ended March 31, 2019, In thousands) | Asset Type | Fair Value | Total Gains (Losses) Recognized | | :------------------------------ | :--------- | :------------------------------ | | Collateral dependent impaired loans | $129 | $170 | | Mortgage servicing rights | $6,341 | $(260) | | Long-lived assets | $134 | $(14) | [Note 16. Fair Value of Financial Instruments](index=42&type=section&id=Note%2016.%20Fair%20Value%20of%20Financial%20Instruments) The estimated fair value of total financial assets was **$24.07 billion** against a carrying amount of **$24.29 billion** Fair Value of Financial Instruments (March 31, 2019, In thousands) | Metric | Carrying Amount | Estimated Fair Value | | :----------------------------------- | :-------------- | :------------------- | | Total Financial Assets | $24,294,255 | $24,067,093 | | Total Financial Liabilities | $21,724,233 | $21,736,020 | [Note 17. Legal and Regulatory Proceedings](index=44&type=section&id=Note%2017.%20Legal%20and%20Regulatory%20Proceedings) The Company is involved in various legal proceedings and accrues for losses when probable and estimable - The Company records a loss accrual for legal and regulatory matters when a loss is probable and can be reasonably estimated[204](index=204&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=45&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's Q1 2019 financial condition, operational results, and risk factors [Overview and Forward-Looking Information](index=45&type=section&id=Overview%20and%20Forward-Looking%20Information) - Forward-looking statements are subject to risks and uncertainties, including changes in economic conditions, regulatory policies, interest rates, and competition[208](index=208&type=chunk) [Critical Accounting Policies](index=45&type=section&id=Critical%20Accounting%20Policies) - Critical accounting policies include the allowance for loan losses, valuation of certain investment securities, and accounting for income taxes, which require subjective judgments[209](index=209&type=chunk) [Selected Financial Data and Ratios](index=46&type=section&id=Selected%20Financial%20Data%20and%20Ratios) Selected Financial Data and Ratios (Three Months Ended March 31) | Metric | 2019 | 2018 | | :----------------------------------- | :-------- | :-------- | | Net income per common share — basic | $0.85 | $0.88 | | Cash dividends on common stock | $0.260 | $0.224 | | Book value per common share | $26.18 | $22.88 | | Return on total assets | 1.58% | 1.66% | | Return on common equity | 13.64% | 15.58% | | Efficiency ratio | 58.76% | 58.21% | | Tier I common risk-based capital ratio | 14.39% | 13.26% | | Tangible common equity to tangible assets ratio | 11.06% | 9.88% | [Results of Operations](index=47&type=section&id=Results%20of%20Operations) Net income decreased **3.8%** year-over-year to **$97.1 million** due to higher loan loss provisions and expenses [Summary of Results](index=47&type=section&id=Summary%20of%20Results) Summary of Results (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :----------------------------------------- | :------------ | :------------ | :------------- | | Net interest income | $203,488 | $192,892 | 5.5% | | Provision for loan losses | $(12,463) | $(10,396) | 19.9% | | Non-interest income | $121,240 | $119,690 | 1.3% | | Investment securities gains (losses), net | $(925) | $5,410 | N.M. | | Non-interest expense | $(191,425) | $(182,277) | 5.0% | | Net income attributable to Commerce Bancshares, Inc. | $97,138 | $100,984 | (3.8)% | | Diluted earnings per common share | $0.85 | $0.88 | (3.4)% | [Net Interest Income](index=48&type=section&id=Net%20Interest%20Income) - Net interest income (T/E basis) **increased $10.5 million** YoY to **$207.1 million** in Q1 2019[223](index=223&type=chunk) - Loan interest income (T/E) **increased $19.6 million (13.2%)** YoY, driven by a **52 basis point** increase in average rates earned and **1.1%** growth in average loan balances[227](index=227&type=chunk) - Total interest expense **increased $11.3 million** YoY, with a **$7.8 million** increase in interest on interest-bearing deposits and a **$3.5 million** increase in interest on borrowings[231](index=231&type=chunk) [Non-Interest Income](index=51&type=section&id=Non-Interest%20Income) Non-Interest Income (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :-------------------------------- | :--------- | :--------- | :------------- | | Bank card transaction fees | $39,644 | $41,453 | (4.4)% | | Trust fees | $37,256 | $36,062 | 3.3% | | Loan fees and sales | $3,309 | $2,862 | 15.6% | | Other non-interest income | $12,387 | $10,272 | 20.6% | | Total Non-Interest Income | $121,240 | $119,690 | 1.3% | - Bank card transaction fees **decreased $1.8 million (4.4%)** YoY, primarily due to declines in corporate card fees, debit card fees, and merchant income[236](index=236&type=chunk) - Other non-interest income **increased $2.1 million** YoY, mainly driven by a **$1.3 million** increase in cash sweep fees and **$1.4 million** in fair value adjustments on deferred compensation plan assets[237](index=237&type=chunk) [Investment Securities Gains (Losses), Net](index=51&type=section&id=Investment%20Securities%20Gains%20(Losses)%2C%20Net) Investment Securities Gains (Losses), Net (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :---------------------------------------- | :-------- | :-------- | | Net gains (losses) on sales of AFS debt securities | $694 | $212 | | Fair value adjustments of private equity investments, net | $(1,842) | $4,305 | | Fair value adjustments on equity securities, net | $223 | $947 | | Total Investment Securities Gains (Losses), Net | $(925) | $5,410 | [Non-Interest Expense](index=52&type=section&id=Non-Interest%20Expense) Non-Interest Expense (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :-------------------------------- | :--------- | :--------- | :------------- | | Salaries and employee benefits | $122,128 | $115,894 | 5.4% | | Data processing and software | $22,260 | $20,690 | 7.6% | | Marketing | $5,900 | $4,805 | 22.8% | | Deposit insurance | $1,710 | $3,457 | (50.5)% | | Other non-interest expense | $17,490 | $15,374 | 13.8% | | Total Non-Interest Expense | $191,425 | $182,277 | 5.0% | - Salaries expense **increased $5.0 million (5.3%)** due to higher full-time salary costs, and employee benefits **increased $1.2 million (5.8%)** due to higher medical costs[244](index=244&type=chunk) - Deposit insurance expense **declined $1.7 million (50.5%)** due to reduced FDIC insurance rates[244](index=244&type=chunk) [Provision and Allowance for Loan Losses](index=53&type=section&id=Provision%20and%20Allowance%20for%20Loan%20Losses) Provision for Loan Losses and Net Loan Charge-offs (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :----------------------------------- | :--------- | :--------- | | Provision for loan losses | $12,463 | $10,396 | | Total net loan charge-offs | $11,713 | $10,396 | | Annualized net loan charge-offs (total) | 0.34% | 0.30% | | Annualized net loan charge-offs (Consumer credit card) | 4.65% | 4.05% | - The allowance for loan losses was **$160.7 million (1.14% of total loans)** at March 31, 2019, considered adequate by management[254](index=254&type=chunk) [Risk Elements of Loan Portfolio](index=54&type=section&id=Risk%20Elements%20of%20Loan%20Portfolio) Non-performing assets and potential problem loans both decreased, indicating stable credit quality [Non-Performing Assets and Delinquent Loans](index=54&type=section&id=Non-Performing%20Assets%20and%20Delinquent%20Loans) Non-Performing Assets (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | Non-accrual loans | $12,167 | $12,536 | | Foreclosed real estate | $737 | $1,413 | | Total Non-Performing Assets | $12,904 | $13,949 | | Non-performing assets as % of total loans | 0.09% | 0.10% | [Potential Problem Loans](index=55&type=section&id=Potential%20Problem%20Loans) Potential Problem Loans (In thousands) | Loan Type | Mar. 31, 2019 | Dec. 31, 2018 | | :---------------------------------- | :------------ | :------------ | | Business | $92,993 | $98,009 | | Real estate – business | $47,502 | $44,854 | | Total Potential Problem Loans | $142,295 | $145,660 | - Troubled debt restructurings totaled **$81.4 million** at March 31, 2019, including **$56.5 million** in substandard commercial loans[260](index=260&type=chunk) [Loans with Special Risk Characteristics](index=55&type=section&id=Loans%20with%20Special%20Risk%20Characteristics) [Real Estate – Construction and Land Loans](index=55&type=section&id=Real%20Estate%20%E2%80%93%20Construction%20and%20Land%20Loans) Real Estate – Construction and Land Loans (March 31, 2019, In thousands) | Loan Type | Amount | % of Total | % of Total Loans | | :---------------------------- | :-------- | :--------- | :--------------- | | Commercial construction | $667,037 | 72.1% | 4.7% | | Residential construction | $133,505 | 14.4% | 1.0% | | Total | $925,269 | 100.0% | 6.6% | [Real Estate – Business Loans](index=56&type=section&id=Real%20Estate%20%E2%80%93%20Business%20Loans) - Business real estate loans comprised **20.3%** of the total loan portfolio at March 31, 2019, with **36.6%** for owner-occupied properties[267](index=267&type=chunk) [Revolving Home Equity Loans](index=56&type=section&id=Revolving%20Home%20Equity%20Loans) - Revolving home equity loans totaled **$364.0 million** at March 31, 2019, with a weighted average FICO score of **792**[269](index=269&type=chunk) [Other Consumer Loans](index=56&type=section&id=Other%20Consumer%20Loans) - Auto loans outstanding were **$887.2 million** at March 31, 2019, with a weighted average FICO score of **754**[270](index=270&type=chunk) - Approximately **$175.2 million (23%)** of consumer credit card loans carried a low promotional rate at March 31, 2019[273](index=273&type=chunk) [Energy Lending](index=57&type=section&id=Energy%20Lending) Energy Lending Portfolio (March 31, 2019, In thousands) | Sector | Amount | Unfunded Commitments | | :--------------------------- | :-------- | :------------------- | | Extraction | $111,255 | $60,316 | | Total Energy Lending Portfolio | $129,014 | $174,203 | [Shared National Credits](index=57&type=section&id=Shared%20National%20Credits) - SNC loans totaled **$848.5 million** at March 31, 2019, with **$1.3 billion** in additional unfunded commitments[278](index=278&type=chunk) [Income Taxes](index=57&type=section&id=Income%20Taxes) Income Tax Expense and Effective Tax Rate (In thousands) | Metric | Q1 2019 | Q4 2018 | Q1 2018 | | :----------------------------------- | :--------- | :--------- | :--------- | | Income tax expense | $22,860 | $26,500 | $23,258 | | Effective tax rate (including non-controlling interest) | 19.1% | 19.5% | 18.7% | [Financial Condition](index=58&type=section&id=Financial%20Condition) Total assets were **$25.0 billion** at March 31, 2019, with earning assets of **$23.8 billion** [Balance Sheet Overview](index=58&type=section&id=Balance%20Sheet%20Overview) - Total assets were **$25.0 billion** at March 31, 2019, and earning assets were **$23.8 billion**, consisting of **60%** loans and **37%** investment securities[282](index=282&type=chunk) [Loans and Investment Securities](index=58&type=section&id=Loans%20and%20Investment%20Securities) - Average loans totaled **$14.1 billion** in Q1 2019, an increase of **$68.9 million** QoQ and **$150.6 million** YoY[283](index=283&type=chunk) - Average available for sale debt securities decreased **$6.7 million** QoQ to **$8.6 billion**[284](index=284&type=chunk) [Deposits and Borrowings](index=58&type=section&id=Deposits%20and%20Borrowings) - Total average deposits **decreased $211.6 million** QoQ, primarily from lower business demand deposits and money market accounts[285](index=285&type=chunk) - Average borrowings **increased $115.5 million** QoQ to **$1.8 billion**[285](index=285&type=chunk) [Liquidity and Capital Resources](index=58&type=section&id=Liquidity%20and%20Capital%20Resources) The Company maintains strong liquidity through core deposits and liquid assets, with capital levels exceeding regulatory requirements [Liquidity Management](index=58&type=section&id=Liquidity%20Management) Liquid Assets (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------------- | :------------ | :------------ | | Available for sale debt securities | $8,627,890 | $8,538,041 | | Long-term securities purchased under agreements to resell | $700,000 | $700,000 | | Balances at the Federal Reserve Bank | $166,077 | $689,876 | | Total Liquid Assets | $9,494,217 | $9,931,237 | - Core customer deposits totaled **$18.1 billion** at March 31, 2019, representing **90.6%** of total deposits[290](index=290&type=chunk) - The Company has **$3.63 billion** in estimated future funding capacity available from the FHLB and Federal Reserve Bank[295](index=295&type=chunk) [Capital Management](index=61&type=section&id=Capital%20Management) Capital Adequacy Ratios (March 31, 2019) | Metric | Company Ratio | Minimum for Well-Capitalized Banks | | :----------------------------------- | :------------ | :--------------------------------- | | Tier I common risk-based capital ratio | 14.39% | 6.50% | | Tier I risk-based capital ratio | 15.15% | 8.00% | | Total risk-based capital ratio | 16.00% | 10.00% | | Tier I leverage ratio | 11.67% | 5.00% | - The Company purchased **647,054 shares** of common stock in Q1 2019, with **1,602,509 shares** remaining available under Board authorization[298](index=298&type=chunk) - The common stock cash dividend **increased by 16.1%** YoY to **$0.26 per share** in Q1 2019[299](index=299&type=chunk) [Commitments, Off-Balance Sheet Arrangements and Contingencies](index=61&type=section&id=Commitments%2C%20Off-Balance%20Sheet%20Arrangements%20and%20Contingencies) - Loan commitments totaled **$10.9 billion** at March 31, 2019, including **$5.1 billion** in unused approved credit card lines[300](index=300&type=chunk) - Standby and commercial letters of credit totaled **$325.6 million** and **$3.9 million**, respectively, at March 31, 2019[300](index=300&type=chunk) - The Company expects to fund **$157.9 million** in outstanding state tax credit purchase commitments during the remainder of 2019[301](index=301&type=chunk) [Segment Results](index=62&type=section&id=Segment%20Results) The Wealth segment showed strong pre-tax income growth (**16.1%**), while the Commercial segment's income declined (**4.9%**) [Consumer Segment](index=62&type=section&id=Consumer%20Segment) Consumer Segment Income Before Income Taxes (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :------------------------- | :--------- | :--------- | :------------- | | Net interest income | $76,897 | $71,021 | 8.3% | | Non-interest income | $29,171 | $30,216 | (3.5)% | | Non-interest expense | $(73,508) | $(69,919) | 5.1% | | Income before income taxes | $21,511 | $20,945 | 2.7% | [Commercial Segment](index=62&type=section&id=Commercial%20Segment) Commercial Segment Income Before Income Taxes (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :------------------------- | :--------- | :--------- | :------------- | | Net interest income | $85,848 | $82,584 | 4.0% | | Non-interest income | $47,915 | $49,209 | (2.6)% | | Non-interest expense | $(76,838) | $(72,778) | 5.6% | | Income before income taxes | $56,307 | $59,195 | (4.9)% | [Wealth Segment](index=63&type=section&id=Wealth%20Segment) Wealth Segment Income Before Income Taxes (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :------------------------- | :--------- | :--------- | :------------- | | Net interest income | $11,676 | $11,445 | 2.0% | | Non-interest income | $44,332 | $42,103 | 5.3% | | Non-interest expense | $(30,892) | $(31,825) | (2.9)% | | Income before income taxes | $25,149 | $21,659 | 16.1% | [Other/Elimination Category](index=63&type=section&id=Other%2FElimination%20Category) - Unallocated securities losses were **$925 thousand** in Q1 2019, compared to gains of **$5.4 million** in Q1 2018[314](index=314&type=chunk) [Impact of Recently Issued Accounting Standards](index=63&type=section&id=Impact%20of%20Recently%20Issued%20Accounting%20Standards) - Adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing **$27.5 million** ROU assets and **$28.1 million** lease liabilities[315](index=315&type=chunk) - The Company is implementing ASU 2016-13 (CECL) and expects preliminary model review and testing in Q2 2019[317](index=317&type=chunk)[318](index=318&type=chunk) - ASU 2017-08 (Premium Amortization) and ASU 2017-04 (Goodwill Impairment) are not expected to have a significant effect[316](index=316&type=chunk)[319](index=319&type=chunk) [Average Balance Sheets — Average Rates and Yields](index=65&type=section&id=Average%20Balance%20Sheets%20%E2%80%94%20Average%20Rates%20and%20Yields) Average Balance Sheets — Average Rates and Yields (Three Months Ended March 31, In thousands) | Metric | 2019 Average Balance | 2019 Avg. Rates Earned/Paid | 2018 Average Balance | 2018 Avg. Rates Earned/Paid | | :----------------------------------- | :------------------- | :-------------------------- | :------------------- | :-------------------------- | | Total interest earning assets | $23,874,861 | 3.93% | $23,693,350 | 3.59% | | Total interest bearing deposits | $13,516,645 | 0.51% | $13,336,242 | 0.28% | | Total borrowings | $1,772,782 | 1.72% | $1,562,486 | 1.04% | | Total interest bearing liabilities | $15,289,427 | 0.65% | $14,898,728 | 0.36% | | Net yield on interest earning assets | N/A | 3.52% | N/A | 3.37% | [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=67&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Net interest income is sensitive to interest rate changes, with potential increases in rising rate scenarios and decreases in falling rate scenarios - The Company uses earnings simulation models to analyze net interest income sensitivity to interest rate movements, performing monthly simulations[331](index=331&type=chunk) Net Interest Income Sensitivity to Interest Rate Shifts (March 31, 2019, In millions) | Scenario (Simulation A) | Net Change in Interest Income | % Change in Net Interest Income | Assumed Deposit Attrition | | :---------------------- | :---------------------------- | :------------------------------ | :------------------------ | | 200 bps rising | $5.5 | 0.66% | $(247.3) | | 100 bps rising | $3.7 | 0.44% | $(128.0) | | 100 bps falling | $(9.7) | (1.16)% | $137.5 | Net Interest Income Sensitivity to Interest Rate Shifts (Simulation B - Higher Deposit Attrition, March 31, 2019, In millions) | Scenario | Net Change in Interest Income | % Change in Net Interest Income | Assumed Deposit Attrition | | :---------------------- | :---------------------------- | :------------------------------ | :------------------------ | | 200 bps rising | $(10.7) | (1.29)% | $(725.2) | | 100 bps rising | $(10.7) | (1.28)% | $(609.8) | [Item 4. Controls and Procedures](index=68&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes in internal controls during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were **effective** as of March 31, 2019[339](index=339&type=chunk) - **No material changes** in internal control over financial reporting occurred during the last fiscal quarter[339](index=339&type=chunk) [PART II OTHER INFORMATION](index=69&type=section&id=Part%20II%20Other%20Information) [Item 1. Legal Proceedings](index=69&type=section&id=Item%201.%20Legal%20Proceedings) Information on legal proceedings is incorporated by reference from Note 17 of the consolidated financial statements - Legal proceedings information is detailed in Note 17 of the consolidated financial statements[342](index=342&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=69&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Company purchased **647,054 shares** of its common stock in Q1 2019 at an average price of **$61.35 per share** Common Stock Purchases (Three Months Ended March 31, 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Shares Remaining Under Program | | :-------------------- | :--------------------- | :--------------------------- | :------------------------------------- | | January 1 — 31, 2019 | 173,686 | $60.67 | 2,075,877 | | February 1 — 28, 2019 | 289,943 | $61.59 | 1,785,934 | | March 1 — 31, 2019 | 183,425 | $61.63 | 1,602,509 | | Total | 647,054 | $61.35 | 1,602,509 | [Item 6. Exhibits](index=69&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the 10-Q report, including certifications and interactive data files - Exhibits include CEO and CFO certifications (31.1, 31.2, 32) and interactive data files (101) for financial statements[346](index=346&type=chunk) [Signatures](index=70&type=section&id=Signatures) The report was signed by the Vice President & Secretary and the Controller on May 7, 2019 - The report was signed by Thomas J. Noack (Vice President & Secretary) and Paul A. Steiner (Controller) on May 7, 2019[352](index=352&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk)

Table of contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2018 — Commission File No. 0-2989 COMMERCE BANCSHARES, INC. (Exact name of registrant as specified in its charter) Missouri 43-0889454 (State of Incorporation)(IRS Employer Identification No.) 1000 Walnut, Kansas City, MO 64106 (Zip Code) (Address of principal executive offices) (Zip Co ...