Forward-Looking Statements
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 which 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 the risk factors identified in Item 1a Risk Factors and the following: 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; changes in accounting and tax principles; estimates made on income taxes; and competition with other entities that offer financial services. Overview
Commerce Bancshares, Inc. and its subsidiaries (the "Company") operates as a super-community bank offering an array of sophisticated financial products delivered with high-quality, personal customer service. It is the largest bank holding company headquartered in Missouri, with its principal offices in Kansas City and St. Louis, Missouri. Customers are served from approximately 360 locations in Missouri, Kansas, Illinois, Oklahoma and Colorado using delivery platforms which include an extensive network of branches and ATM machines, full-featured online banking, and a central contact center.

The core of the Company's competitive advantage is its focus on the local markets it services and its concentration on relationship banking and high touch service. In order to enhance shareholder value, the Company grows its core revenue by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction.

Various indicators are used by management in evaluating the Company's financial condition and operating performance. Among these indicators are the following:
• Net income and growth in earnings per share - Net income attributable to Commerce Bancshares, Inc. was $269.3 million, an increase of 5.1% compared to the previous year. The return on average assets was 1.30%. Diluted earnings per share increased 7.8% in 2012 compared to 2011.

• Growth in total revenue - Total revenue is comprised of net interest income and non-interest income. Total revenue in 2012 increased slightly over 2011, as non-interest income grew $6.7 million and net interest income fell $6.2 million. Non-interest income saw increases in trust and capital market fees, partly offset by declines in bank card transaction fees, deposit fees, and loan fees and sales. However, past regulatory actions which have reduced fees from overdraft, debit card, and student lending activities have been somewhat mitigated by growth in corporate card revenue, which increased $13.0 million in 2012, and growth in other types of deposit fees. The net interest margin declined to 3.41% in 2012, a 24 basis point decline from 2011, as average rates continued to fall and the lending environment remained challenging.

• Expense control - Total non-interest expense increased less than 1% this year compared to 2011. Salaries and employee benefits, the largest component, increased by $15.6 million, or 4.5% due to higher salaries, incentives, medical and retirement costs. In addition, other operating expenses included a $5.7 million increase in data processing costs and the accrual of $5.2 million in potential losses arising from the preliminary settlement of Visa, Inc. (Visa) credit card interchange litigation.

• Asset quality - Net loan charge-offs in 2012 decreased $25.2 million from those recorded in 2011 and averaged .42% of loans compared to .70% in the previous year. Total non-performing assets, which include non-accrual loans and foreclosed real estate, amounted to $64.9 million at December 31, 2012, a decrease of $28.9 million from balances at the previous year end, and represented .66% of loans outstanding.

• Shareholder return - Total shareholder return, including the change in stock price and dividend reinvestment, was 2.6% over the past year and 6.5% over the past 10 years. Record earnings over the last two years have strengthened capital

and liquidity and allowed the Company to pay a special fourth quarter cash dividend of $1.43* per share in advance of higher tax rates now in effect.
* Restated for the 5% stock dividend distributed in December 2012.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results.

Key Ratios
(Based on average balances)                2012      2011      2010      2009      2008
Return on total assets                      1.30 %    1.32 %    1.22 %     .96 %    1.15 %
Return on total equity                     12.00     12.15     11.15      9.76     11.81
Equity to total assets                     10.84     10.87     10.91      9.83      9.71
Loans to deposits (1)                      55.80     59.15     70.02     79.79     92.11
Non-interest bearing deposits to total
deposits                                   32.82     30.26     28.65     26.48     24.05
Net yield on interest earning assets
(tax equivalent basis)                      3.41      3.65      3.89      3.93      3.96
(Based on end of period data)
Non-interest income to revenue (2)         38.44     37.82     38.54     38.41     38.80
Efficiency ratio (3)                       59.26     59.10     59.71     59.88     63.08
Tier I risk-based capital ratio            13.60     14.71     14.38     13.04     10.92
Total risk-based capital ratio             14.93     16.04     15.75     14.39     12.31
Tier I leverage ratio                       9.14      9.55     10.17      9.58      9.06
Tangible common equity to assets
ratio (4)                                   9.25      9.91     10.27      9.71      8.25
Cash dividend payout ratio                 79.48     31.06     35.52     44.15     38.54

(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).

Selected Financial Data
(In thousands, except per share
data)                                2012           2011           2010           2009           2008
Net interest income             $    639,906   $    646,070   $    645,932   $    635,502   $    592,739
Provision for loan losses             27,287         51,515        100,000        160,697        108,900
Non-interest income                  399,630        392,917        405,111        396,259        375,712
Investment securities gains
(losses), net                          4,828         10,812         (1,785 )       (7,195 )       30,294
Non-interest expense                 618,469        617,249        631,134        621,737        615,380
Net income attributable to
Commerce Bancshares, Inc.            269,329        256,343        221,710        169,075        188,655
Net income per common
share-basic*                            2.91           2.70           2.30           1.79           2.05
Net income per common
share-diluted*                          2.90           2.69           2.29           1.78           2.04
Cash dividends                       211,608         79,140         78,231         74,720         72,055
Cash dividends per share*              2.305           .834           .812           .790           .784
Market price per share*                35.06          36.30          36.04          33.45          36.16
Book value per share*                  23.76          23.24          21.19          19.63          17.14
Common shares outstanding*            91,414         93,400         95,503         96,093         92,124
Total assets                      22,159,589     20,649,367     18,502,339     18,120,189     17,532,447
Loans, including held for sale     9,840,211      9,208,554      9,474,733     10,490,327     11,644,544
Investment securities              9,669,735      9,358,387      7,409,534      6,473,388      3,780,116
Deposits                          18,348,653     16,799,883     15,085,021     14,210,451     12,894,733
Long-term debt                       503,710        511,817        512,273      1,236,062      1,447,781
Equity                             2,171,574      2,170,361      2,023,464      1,885,905      1,579,467
Non-performing assets                 64,863         93,803         97,320        116,670         79,077

* Restated for the 5% stock dividend distributed in December 2012.

Results of Operations
                                                                   $ Change               % Change
(Dollars in thousands)      2012        2011        2010      '12-'11    '11-'10      '12-'11   '11-'10
Net interest income      $ 639,906   $ 646,070   $ 645,932   $ (6,164 ) $    138       (1.0 )%       - %
Provision for loan
losses                     (27,287 )   (51,515 )  (100,000 )  (24,228 )  (48,485 )    (47.0 )    (48.5 )
Non-interest income        399,630     392,917     405,111      6,713    (12,194 )      1.7       (3.0 )
Investment securities
gains (losses), net          4,828      10,812      (1,785 )   (5,984 )   12,597      (55.3 )       NM
Non-interest expense      (618,469 )  (617,249 )  (631,134 )    1,220    (13,885 )       .2       (2.2 )
Income taxes              (127,169 )  (121,412 )   (96,249 )    5,757     25,163        4.7       26.1
Non-controlling interest
expense                     (2,110 )    (3,280 )      (165 )   (1,170 )    3,115      (35.7 )       NM
Net income attributable
to Commerce Bancshares,
Inc.                     $ 269,329   $ 256,343   $ 221,710   $ 12,986   $ 34,633        5.1  %    15.6 %

Net income attributable to Commerce Bancshares, Inc. for 2012 was $269.3 million, an increase of $13.0 million, or 5.1%, compared to $256.3 million in 2011. Diluted income per share was $2.90 in 2012 compared to $2.69 in 2011. The increase in net income largely resulted from a $24.2 million decrease in the provision for loan losses coupled with an increase of $6.7 million in non-interest income. These increases to net income were partly offset by a decline of $6.2 million in net interest income, $6.0 million in lower net securities gains, and a $5.8 million increase in income tax expense. The return on average assets was 1.30% in 2012 compared to 1.32% in 2011, and the return on average equity was 12.00% compared to 12.15% in 2011. At December 31, 2012, the ratio of tangible common equity to assets was 9.25% compared to 9.91% at year end 2011.

During 2012, net interest income decreased $6.2 million to $639.9 million, as compared to $646.1 million in 2011. This decline was due to lower rates earned on investment securities and loans, partly offset by higher balances in these assets and lower rates paid on deposits. The provision for loan losses totaled $27.3 million in 2012, a decrease of $24.2 million from the prior year. Net loan charge-offs declined by $25.2 million in 2012 compared to 2011, mainly in business, construction, consumer, and consumer credit card loans.

Non-interest income for 2012 was $399.6 million, an increase of $6.7 million, or 1.7%, compared to $392.9 million in 2011. This increase resulted mainly from higher trust fees and capital market fees, and a $13.0 million increase in corporate card revenue. Corporate card revenue has shown strong growth over the past several years, resulting from both new customer transactions and increased volumes from existing customers as the Company continues to expand this product on a national basis. Debit card interchange income, which was limited by rules adopted in Dodd-Frank legislation effective in the fourth quarter of 2011, declined $19.3 million. Deposit fees decreased $3.2 million, as declines in overdraft and return items fees were partly offset by increases in other types of deposit fees. Loan fees and sales declined $1.5 million, as sales of home mortgages in the secondary market were discontinued in late 2011.

Investment securities gains amounted to $4.8 million, a decrease of $6.0 million from $10.8 million in investment securities gains during 2011. The 2012 gains resulted mainly from fair value adjustments and sales of private equity investments.

Non-interest expense for 2012 was $618.5 million, an increase of $1.2 million over $617.2 million in 2011. This slight overall increase included a $15.6 million increase in salaries and benefits expense, as well as a $5.7 million increase in data processing and software expense. During 2012, non-interest expense included a $5.2 million loss contingency related to Visa interchange litigation, which is discussed further in Note 18 to the consolidated financial statements. Offsetting these increases in non-interest expense during 2012 was $18.3 million expensed during 2011 related to debit card overdraft litigation, also discussed further in Note 18. Income tax expense was $127.2 million in 2012 compared to $121.4 million in 2011, resulting in an effective tax rate of 32.1% in both years.

Net income attributable to Commerce Bancshares, Inc. for 2011 was $256.3 million, an increase of $34.6 million, or 15.6%, compared to $221.7 million in 2010. Diluted income per share was $2.69 in 2011 compared to $2.29 in 2010. The increase in net income resulted from a $48.5 million decrease in the provision for loan losses coupled with a decline of $13.9 million in non-interest expense and $12.6 million in higher net securities gains. These effects were partly offset by a $12.2 million decline in non-interest income and a $25.2 million increase in income tax expense. Non-interest expense included the accrual of $18.3 million for a lawsuit settlement regarding debit card overdrafts, as mentioned above. In addition, an indemnification obligation liability related to Visa, also discussed in Note 18, was reduced by $4.4 million, decreasing expense. The return on average assets was 1.32% in 2011 compared to 1.22% in 2010, and the return on average equity was 12.15% compared to 11.15% in 2010. At December 31, 2011, the ratio of tangible common equity to assets was 9.91% compared to 10.27% at year end 2010.

During 2011, net interest income increased $138 thousand to $646.1 million, as compared to $645.9 million in 2010. This slight growth was due to lower rates incurred on deposits, higher average balances in investment securities, and lower average borrowing levels. These effects were partly offset by lower rates earned on both investment securities and loans, in addition to lower loan balances. The provision for loan losses totaled $51.5 million in 2011, a decrease of $48.5 million from the prior year. Net loan charge-offs declined by $32.4 million in 2011 compared to 2010, mainly in construction, consumer, and consumer credit card loans.

Non-interest income for 2011 was $392.9 million, a decrease of $12.2 million, or 3.0%, compared to $405.1 million in 2010. This decrease was the result of a decline in overdraft fees of $10.2 million in 2011, due to the Company's implementation on July 1, 2010 of new overdraft regulations on debit card transactions, as well as a decline of $3.1 million in debit card interchange income resulting from the Dodd-Frank legislation mentioned above. Also contributing to the decline in non-interest income in 2011 was a $14.6 million decrease in gains on sales of student loans. This occurred as new federal regulations over guaranteed student loans caused the Company to exit the guaranteed student loan business and the Company sold most of its student loans in 2010. Partially offsetting these decreases in non-interest income was a $9.5 million increase in corporate card revenue. In addition, trust fees rose $7.4 million on strong new account sales.

Investment securities gains amounted to $10.8 million, an increase of $12.6 million over $1.8 million in investment securities losses during 2010. As in 2012, the 2011 gains also resulted mainly from fair value adjustments and sales of private equity investments.

Non-interest expense for 2011 was $617.2 million, a decrease of $13.9 million, or 2.2%, compared to $631.1 million in 2010. This decline was partly due to slight decreases in salaries and benefits expense, as well as marketing and equipment expenses, but was mainly driven by reductions of $4.7 million in supplies and communication expense and $6.1 million in FDIC insurance expense. During 2010, non-interest expense included an $11.8 million debt pre-payment penalty on Federal Home Loan Bank (FHLB) advances. These effects on non-interest expense were partly offset by an $18.3 million loss recorded in 2011 related to debit card overdraft litigation, as mentioned above. Income tax expense was $121.4 million in 2011 compared to $96.2 million in 2010, resulting in effective tax rates of 32.1% and 30.3%, respectively.

The Company paid a special cash dividend of $1.43 per share, in addition to its regular quarterly cash dividend of $.22 per share, on December 17, 2012. In addition, it distributed a 5% stock dividend for the nineteenth consecutive year. All per share and average share data in this report has been restated to reflect the 2012 stock dividend.

Critical Accounting Policies
The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company's reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the current instability of the economy. 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 losses, the valuation of certain investment securities, and accounting for income taxes.

Allowance for Loan Losses
The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company's estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal banking loans, including personal real estate, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Further discussion of the methodology used in establishing the allowance is provided in the Allowance for Loan Losses section of Item 7 and in Note 1 to the consolidated financial statements.

Valuation of Investment Securities
The Company carries its investment securities at fair value and employs valuation techniques which utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security and are developed based on market data obtained from sources independent of the Company. When such information is not available, the Company employs valuation techniques which utilize unobservable inputs, or those which reflect the Company's own assumptions about market participants, based on the best information available in the circumstances. These valuation methods typically involve cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, estimates, or other inputs to the valuation techniques could have a material impact on the Company's future financial condition and results of operations. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Under the fair value measurement hierarchy, fair value measurements are classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable, internally-derived inputs), as discussed in more detail in Note 15 on Fair Value Measurements. Most of the available for sale investment portfolio is priced utilizing industry-standard models that consider various assumptions observable in the marketplace or which can be derived from observable data. Such securities totaled approximately $8.9 billion, or 93.9% of the available for sale portfolio at December 31, 2012, and were classified as Level 2 measurements. The Company also holds $126.4 million in auction rate securities. These were classified as Level 3 measurements, as no liquid market currently exists for these securities, and fair values were derived from internally generated cash flow valuation models which used unobservable inputs significant to the overall measurement.

Changes in the fair value of available for sale securities, excluding credit losses relating to other-than-temporary impairment, are reported in other comprehensive income. The Company periodically evaluates the available for sale portfolio for other-than-temporary impairment. Evaluation for other-than-temporary impairment is based on the Company's intent to sell the security and whether it is likely that it will be required to sell the security before the anticipated recovery of its amortized cost basis. If either of these conditions is met, the entire loss (the amount by which the amortized cost exceeds the fair value) must be recognized in current earnings. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company must determine whether a credit loss has occurred. This credit loss is the amount by which the amortized cost basis exceeds the present value of cash flows expected to be collected from the security. The credit loss, if any, must be recognized in current earnings, while the remainder of the loss, related to all other factors, is recognized in other comprehensive income.

The estimation of whether a credit loss exists and the period over which the security is expected to recover requires significant judgment. The Company must consider available information about the collectability of the security, including information about past events, current conditions, and reasonable forecasts, which includes payment structure, prepayment speeds, expected defaults, and collateral values. Changes in these factors could result in additional impairment, recorded in current earnings, in future periods.

At December 31, 2012, certain non-agency guaranteed mortgage-backed securities with a fair value of $101.7 million were identified as other-than-temporarily impaired. The cumulative credit-related impairment loss initially recorded on these securities amounted to $11.6 million, which was recorded in the consolidated statements of income.

The Company, through its direct holdings and its private equity subsidiaries, has numerous private equity investments, categorized as non-marketable securities in the accompanying consolidated balance sheets. These investments are reported at fair value and totaled $73.2 million at December 31, 2012. Changes in fair value are reflected in current earnings and reported in investment securities gains (losses), net, in the consolidated statements of income. Because there is no observable market data for these securities, fair values are internally developed using available information and management's judgment, and the securities are classified as Level 3 measurements. Although management believes its estimates of fair value reasonably reflect the fair value of these securities, key assumptions regarding the projected financial performance of these companies, the evaluation of the investee company's management team, and other economic and market factors may affect the amounts that will ultimately be realized from these investments.

Accounting for Income Taxes
Accrued income taxes represent the net amount of current income taxes which are expected to be paid attributable to operations as of the balance sheet date. Deferred income taxes represent the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Current and deferred income taxes are reported as either a component of other assets or other liabilities in the consolidated balance sheets, depending on whether the balances are assets or liabilities. Judgment is required in applying generally accepted accounting principles in accounting for income taxes. The Company regularly monitors taxing authorities for changes in laws and regulations and their interpretations by the judicial systems. The aforementioned changes, as well as any changes that may result from the resolution of income tax examinations by federal and state taxing authorities, may impact the estimate of accrued income taxes and could materially impact the Company's financial position and results of operations.

Net Interest Income
Net interest income, the largest source of revenue, results from the Company's
lending, investing, borrowing, and deposit gathering activities. It is affected
by both changes in the level of interest rates and changes in the amounts and
mix of interest earning assets and interest bearing liabilities. The following
table summarizes the changes in net interest income on a fully taxable
. . .