The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2011 Annual Report on Form 10-K. Results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of results to be attained for any other period.

Forward Looking Information

This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, failure of litigation settlement agreements to become final in accordance with their terms, and competition with other entities that offer financial services.

Critical Accounting Policies

The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan loans losses, the valuation of certain investment securities, and accounting for income taxes. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2011 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2011.

Selected Financial Data
                                                          Three Months Ended June 30        Six Months Ended June 30
                                                              2012            2011             2012           2011
Per Share Data
  Net income per common share - basic                   $        .80     $        .76     $      1.54    $      1.42
  Net income per common share - diluted                          .80              .75            1.54           1.41
  Cash dividends                                                .230             .219            .460           .438
  Book value                                                                                    25.47          23.38
  Market price                                                                                  37.90          40.95
Selected Ratios
(Based on average balance sheets)
  Loans to deposits (1)                                        55.26 %          60.17 %         55.39 %        61.30 %
  Non-interest bearing deposits to total deposits              32.29            29.53           31.61          29.37
  Equity to loans (1)                                          24.04            22.67           23.95          22.14
  Equity to deposits                                           13.28            13.64           13.27          13.57
  Equity to total assets                                       10.82            11.19           10.78          11.13
  Return on total assets                                        1.38             1.47            1.34           1.40
  Return on total equity                                       12.80            13.12           12.42          12.54
(Based on end-of-period data)
  Non-interest income to revenue (2)                           37.91            38.09           37.56          37.72
  Efficiency ratio (3)                                         58.53            57.40           58.72          58.50
  Tier I risk-based capital ratio                                                               14.80          15.10
  Total risk-based capital ratio                                                                16.13          16.46
  Tangible common equity to assets ratio (4)                                                    10.16          10.27
  Tier I leverage ratio                                                                          9.73          10.32

(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity ratio is calculated as stockholders' equity reduced by goodwill and other intangible assets (excluding mortgage servicing rights) divided by total assets reduced by goodwill and other intangible assets (excluding mortgage servicing rights).

Results of Operations

Summary
                                         Three Months Ended June 30           Six Months Ended June 30
(Dollars in thousands)                   2012        2011     % change       2012        2011     % change
Net interest income                  $  165,105   $ 164,710       .2  %   $ 324,842   $ 325,683      (.3 )%
Provision for loan losses                (5,215 )   (12,188 )  (57.2 )      (13,380 )   (27,977 )  (52.2 )
Non-interest income                     100,816     101,344      (.5 )      195,399     197,250      (.9 )
Investment securities gains, net          1,336       1,956    (31.7 )        5,376       3,283     63.8
Non-interest expense                   (156,340 )  (153,513 )    1.8       (306,801 )  (307,473 )    (.2 )
Income taxes                            (34,466 )   (32,692 )    5.4        (67,386 )   (60,199 )   11.9
Non-controlling interest expense           (503 )      (583 )  (13.7 )       (1,518 )    (1,080 )   40.6
Net income attributable to Commerce
Bancshares, Inc.                     $   70,733   $  69,034      2.5  %   $ 136,532   $ 129,487      5.4  %

For the quarter ended June 30, 2012, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $70.7 million, an increase of $1.7 million, or 2.5%, compared to the second quarter of the previous year, and an increase of $4.9 million compared to the previous quarter. For the current quarter, the annualized return on average assets was 1.38%, the annualized return on average equity was 12.80%, and the efficiency ratio was 58.53%. Diluted earnings per share was $.80, an increase of 6.7% compared to $.75 per share in the second quarter of 2011. During the current quarter, the Company recorded loan recoveries totaling $3.6 million (effectively reducing the provision for loan losses) and recorded interest income of $1.3 million on two non-performing commercial loans. The Company also received interest income of $1.1 million on the early pay-off of a commercial real estate loan. These items were offset by an expense accrual of $5.7 million related to the provisions in the proposed settlement of certain Visa-related interchange litigation. The proposed settlement, which was announced in July 2012, is discussed further in Note 14 to the consolidated financial statements.

Compared to the second quarter of last year, net interest income increased $395 thousand, or .2%, mainly due to lower rates paid on interest bearing deposits. This effect was partly offset by lower loan yields, which occurred despite the large collections mentioned above. Non-interest income declined $528 thousand and non-interest expense increased $2.8 million, or 1.8%. The increase in non-interest expense was mainly attributable to the $5.7 million Visa litigation accrual noted above, coupled with an increase in salaries and benefits of $3.3 million, but partly offset by a $5.0 million loss contingency recorded in the second quarter of 2011 for debit card overdraft litigation that was resolved later in 2011. The provision for loan losses totaled $5.2 million for the current quarter, representing a decrease of $7.0 million, or 57.2%, from the second quarter of 2011.

Net income for the first six months of 2012 was $136.5 million, an increase of $7.0 million, or 5.4%, over the same period last year and included a decline of $14.6 million, or 52.2%, in the provision for loan losses. Diluted earnings per share was $1.54, an increase of 9.2% compared to $1.41 per share in the same period last year. For the first six months of 2012, the annualized return on average assets was 1.34%, the annualized return on average equity was 12.42%, and the efficiency ratio was 58.72%. Net interest income decreased $841 thousand, or .3%, due to lower earnings on the Company's loan portfolio, partly offset by lower expense incurred on deposits. Non-interest income decreased $1.9 million, or .9%, due to a decline of $12.9 million in debit card fees (the effect of new debit card fee regulations effective late in 2011). These declines were partly offset by increases of $7.0 million in merchant and corporate card fees, $2.5 million in trust fees and $2.2 million in capital market fees. Net securities gains increased $2.1 million, mainly due to fair value adjustments and sales of private equity investments. Non-interest expense decreased $672 thousand, or .2%, compared to the same period last year and included lower occupancy, equipment and FDIC insurance costs, offset by higher salaries and benefits and data processing costs.

Net Interest Income

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income
                                              Three Months Ended June 30, 2012 vs. 2011             Six Months Ended June 30, 2012 vs. 2011
                                                    Change due to                                        Change due to
                                             Average           Average                             Average          Average
(In thousands)                                Volume             Rate             Total            Volume            Rate             Total
Interest income, fully taxable
equivalent basis:
Loans                                    $        (337 )  $        (4,147 )  $      (4,484 )   $     (3,348 )  $       (7,704 )  $      (11,052 )
Loans held for sale                               (255 )               34             (221 )           (493 )              79              (414 )
Investment securities:
 U.S. government and federal agency
securities                                        (268 )           (1,779 )         (2,047 )         (1,875 )          (2,584 )          (4,459 )
 Government-sponsored enterprise
obligations                                        170               (112 )             58              562              (153 )             409
 State and municipal obligations                 1,921             (2,403 )           (482 )          3,651            (3,749 )             (98 )
 Mortgage-backed securities                      8,595             (7,426 )          1,169           20,747           (18,271 )           2,476
 Asset-backed securities                         1,621             (1,351 )            270            3,217            (3,221 )              (4 )
 Other securities                                 (120 )              980              860              (58 )             801               743
   Total interest on investment
securities                                      11,919            (12,091 )           (172 )         26,244           (27,177 )            (933 )
Short-term federal funds sold and
securities purchased under
  agreements to resell                               8                 (1 )              7               21                (7 )              14
Long-term securities purchased under
agreements to resell                               181              1,236            1,417            1,269             2,261             3,530
Interest earning deposits with banks               (10 )               12                2              (47 )              14               (33 )
Total interest income                           11,506            (14,957 )         (3,451 )         23,646           (32,534 )          (8,888 )
Interest expense:
Deposits:
 Savings                                            16                (31 )            (15 )             33               (14 )              19
 Interest checking and money market                614             (2,337 )         (1,723 )          1,477            (5,053 )          (3,576 )
 Time open & C.D.'s of less than
$100,000                                          (419 )             (542 )           (961 )         (1,121 )          (1,477 )          (2,598 )
 Time open & C.D.'s of $100,000 and over          (143 )             (463 )           (606 )           (172 )          (1,196 )          (1,368 )
   Total interest on deposits                       68             (3,373 )         (3,305 )            217            (7,740 )          (7,523 )
Federal funds purchased and securities
sold under
  agreements to repurchase                          78               (588 )           (510 )            227            (1,134 )            (907 )
Other borrowings                                    (5 )              (38 )            (43 )             (7 )             (45 )             (52 )
Total interest expense                             141             (3,999 )         (3,858 )            437            (8,919 )          (8,482 )
Net interest income, fully taxable
equivalent basis                         $      11,365    $       (10,958 )  $         407     $     23,209    $      (23,615 )  $         (406 )

Net interest income for the second quarter of 2012 was $165.1 million, a $395 thousand increase over the second quarter of 2011. On a tax equivalent (T/E) basis, net interest income totaled $171.2 million, up from $165.7 million in the previous quarter and up from $170.8 million in the same quarter last year. This increase over the same period last year was mainly the result of lower rates paid on deposits largely offset by lower loan yields. The Company's net interest rate margin was 3.55% for the second quarter of 2012, compared to 3.45% in the previous quarter and 3.85% in the second quarter of 2011.

Total interest income (T/E) decreased $3.5 million, or 1.9%, from the second quarter of 2011. Interest income on loans, including loans held for sale, declined $4.7 million due a 17 basis point decrease in average rates earned, while average loan balances decreased less than 1.0%. The overall average rate earned on total loans was 4.95% compared to 5.10% in the second quarter of 2011. Average business loans and average construction and land loans decreased $63.8 million and $69.6 million, respectively, and, coupled with a decrease in average rates earned on these loans, caused a $2.1 million decrease in interest income. Included in business loan interest income in the current quarter was $1.3 million collected on a non-performing loan. Excluding this interest payment, the average rate earned on business loans for the second quarter of 2012 would have been lower by 18 basis points.

Average business real estate loans increased $104.8 million, or 5.0%, the impact of which was offset by a decrease of 23 basis points in the average rate earned on those loans. An interest payment of $1.1 million related to an early loan payoff in the current quarter contributed 20 basis points to the average rate earned on business real estate loans during the quarter. Interest income from personal real estate loans decreased $1.1 million primarily due to a 41 basis point decrease in the average rate earned and slightly offset by a $35.2 million, or 2.4%, increase in average loan balances. Interest income from consumer loans decreased $1.4 million due to a 59 basis point decrease in the average rate earned, slightly offset by an increase in average balances of $22.5 million, or 2.0%. Reflected in the increase in consumer average loan balances were higher auto and fixed-rate home equity loan balances of $109.0 million, offset by a decrease of $107.2 million in marine and RV loans as that portfolio continues to pay down (since the Company no longer originates these types of loans). Average consumer credit card loans decreased $30.6 million compared to the second quarter of 2011, while the average rate earned on these balances increased to 11.87% from 11.13%.

Interest income on investment securities (T/E) was $62.2 million during the second quarter of 2012 compared to $62.4 million during the same period last year. The average balance of the total portfolio increased $1.6 billion, or 21.6%, compared to the second quarter of 2011. This growth mainly occurred in mortgage and asset-backed securities, which increased by $952.3 million and $497.5 million, respectively. The effect of higher total portfolio balances was offset by lower overall average yields, which declined to 2.75% compared to 3.34% during the second quarter of 2011. The current quarter included a decrease of $2.0 million in interest earned on inflation-protected securities. Interest income on non-marketable securities increased $989 thousand in the current quarter, which related mainly to investments held by the Company's private equity subsidiaries.

The average balances of long-term securities purchased under agreements to resell increased $46.2 million, or 5.7%, over the second quarter of 2011, while the average rate earned increased 59 basis points, together contributing an increase in interest income of $1.4 million.

The average tax equivalent yield on total interest earning assets was 3.75% in the second quarter of 2012 compared to 4.15% in the second quarter of 2011.

Total interest expense decreased $3.9 million, or 28.8%, compared to the second quarter of 2011, primarily due to a $3.3 million decrease in interest expense on interest bearing deposits. The decrease in interest expense on deposits resulted primarily from a 12 basis point decrease in average rates paid on interest checking and money market accounts, coupled with a 13 basis point decrease in average rates paid on time open and certificates of deposit. Also, average time open and certificate of deposit balances decreased $411.5 million, or 14.7%, which was offset by an increase of $774.2 million, or 10.6%, in average money market account balances. The overall average rate incurred on all interest bearing liabilities decreased to .30% in the second quarter of 2012 compared to .45% in the second quarter of 2011.

Net interest income (T/E) for the first six months of 2012 was $336.9 million compared to $337.3 million for the same period in 2011. For the first six months of 2012, the net yield on total interest earning assets on a tax equivalent basis was 3.50% compared to 3.85% in the first six months of 2011. The components of net interest income for the first six months of 2012 compared to the same period in 2011 reflected trends similar to the quarterly discussion above.

Total interest income (T/E) for the first six months of 2012 decreased $8.9 million from the same period last year primarily due to lower loan yields coupled with a decrease in average loan balances, partially offset by an increase in interest income earned on securities purchased under agreements to resell. Loan interest income (T/E, including loans held for sale) declined $11.5 million due to a 17 basis point decrease in the average interest rate earned, coupled with a $170.9 million, or 1.8%, decline in total average loan balances. Similar to trends noted in the quarterly comparison, decreases occurred in average business, construction, and consumer credit card loan balances, while both business and personal real estate loan balances increased. Average consumer loans, however, decreased slightly in the six month period. Investment securities interest income (T/E) decreased $933 thousand and resulted from a decrease in average rates earned of 65 basis points, largely offset by an increase in average investment securities balances. Average investment securities balances increased to $9.1 billion for the first six months of 2012 from $7.4 billion for the same period in 2011, primarily due to a $1.1 billion increase in average mortgage-backed securities. Included in the decrease in investment securities interest income was a $4.6 million decrease in interest earned on inflation-protected securities. Interest income on long-term securities purchased under agreements to resell increased $3.5 million in the first six months of 2012 compared to the prior period due to increases in both average balances and average rates earned.

The decrease of $8.5 million in interest expense for the first six months of 2012 compared to the same period in the prior year was due to a $7.5 million, or 30.0%, decrease in interest expense on interest bearing deposits. The decrease in interest expense on deposits primarily resulted from a 16 basis point decrease in average rates paid.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

Non-Interest Income
Three Months Ended June 30 Six Months Ended June 30 (Dollars in thousands) 2012 2011 % change 2012 2011 % change Bank card transaction fees $ 38,434 $ 41,304 (6.9 )% $ 73,167 $ 78,766 (7.1 )% Trust fees 23,833 22,544 5.7 46,647 44,116 5.7 Deposit account charges and other
fees 19,975 20,789 (3.9 ) 39,311 40,089 (1.9 ) Capital market fees 5,010 4,979 .6 11,881 9,699 22.5 Consumer brokerage services 2,576 2,880 (10.6 ) 5,102 5,543 (8.0 ) Loan fees and sales 1,706 2,075 (17.8 ) 3,267 3,899 (16.2 ) Other 9,282 6,773 37.0 16,024 15,138 5.9 Total non-interest income $ 100,816 $ 101,344 (.5 )% $ 195,399 $ 197,250 (.9 )% Non-interest income as a % of total
revenue* 37.9 % 38.1 % 37.6 % 37.7 %

* Total revenue includes net interest income and non-interest income.

For the second quarter of 2012, total non-interest income amounted to $100.8 million compared with $101.3 million in the same quarter last year, which was a decrease of $528 thousand, or .5%. Bank card fees for the quarter declined $2.9 million, or 6.9%, from the second quarter of last year, as a result of a decline in debit card interchange fees of $7.0 million, or 44.5% (mainly the effect of new pricing limitations effective in late 2011), but was partly offset by growth in corporate card fees of $3.6 million, or 25.5%. Corporate card and debit card fees for the current quarter totaled $17.7 million and $8.7 million, respectively. Merchant fees grew by 6.1% due to higher transaction volumes, and totaled $6.4 million for the quarter. Trust fees for the quarter increased $1.3 million, or 5.7%, over the same quarter last year, resulting mainly from growth in both personal and institutional trust fees. Deposit account fees declined $814 thousand, or 3.9%, compared to last year as overdraft fees declined by $1.7 million, but were offset by growth in various other deposit fees of $892 thousand, or 38.5%. Capital market fees for the current quarter increased slightly to $5.0 million, while consumer brokerage services revenue decreased by $304 thousand, or 10.6%, due to declines in life insurance revenue. Loan fees and sales revenue was down $369 thousand, or 17.8%, from the same period last year mainly due to a decline in gains on student loan sales and lower mortgage banking revenue, partly offset by higher commercial loan commitment fees. Other non-interest income for the current quarter increased $2.5 million over the same quarter last year and included higher tax credit sales income and lease-related fees.

Non-interest income for the six months ended June 30, 2012 was $195.4 million compared to $197.3 million in the first six months of 2011, resulting in a decrease of $1.9 million, or .9%. Bank card fees decreased $5.6 million, or 7.1%, as a result of a $12.9 million, or 43.0%, decrease in debit card interchange fees, partly offset by growth in corporate card and merchant fees of 21.2% and 10.2%, respectively. Trust fee income increased $2.5 million, or 5.7%, as a result of growth in personal and institutional trust fees. Deposit account fees decreased $778 thousand, or 1.9%, mainly due to a decline in overdraft and return item fees of $2.5 million, while various other deposit fees increased $1.7 million. Capital market fees increased $2.2 million, or 22.5%, as a result of growth in sales of mainly fixed income securities to correspondent banks and other commercial customers. Consumer brokerage services revenue decreased by $441 thousand, or 8.0%, mainly due to a decline in variable annuity commissions and life insurance income, partly offset by growth in advisory fees. Loan fees and sales decreased $632 thousand, or 16.2%, due to a decline in mortgage banking revenue. Other non-interest income increased by $886 thousand, or 5.9%, mainly due to higher tax credit sales income and lease-related fees, partly offset by lower fees on interest rate swap sales.

As discussed in Note 14 to the consolidated financial statements, the Company has agreed to change the posting order of debit card transactions. The change in posting order is expected to begin no later than April 2013. As a result of this change, overdraft income is expected to be reduced on an annual basis by $6 to $8 million.

Investment Securities Gains (Losses), Net

Net gains and losses on investment securities which were recognized in earnings during the three and six months ended June 30, 2012 and 2011 are shown in the table below. Net securities gains amounted to $1.3 million in the second quarter . . .