Zacks_Analysts' Blog : Commerce Bancshares Lags by a Penny - Analyst Blog

Commerce Bancshares Inc.(CBSH) reported third quarter 2011 earnings of 76 cents per share, a penny below the Zacks Consensus Estimate. Though the result compare unfavorably with the prior quarter’s earnings of 79 cents per share, it is ahead of the year-ago quarter’s earnings of 64 cents.

Net income for the quarter was $65.4 million, down 5.3% sequentially from $69.0 million but up 16.9% year over year from $55.9 million. The year-over-year improvement ensued from a constant focus on expense management and lower loan loss provision.

Commerce Bancshares’ results in the quarter were affected by lower top line. Further, average loans declined on a lower line of credit usage. However, improving credit quality, capital ratios and nearly flat operating expenses were the positives.

Quarter in Detail

Commerce Bancshares’ quarterly total revenues were $260.3 million, down from $266.1 million in the prior quarter but up from $259.4 million in the prior-year quarter. The company’s revenues also missed the Zacks Consensus Estimate of $268.0 million.

Quarterly taxable-equivalent net interest income fell 3.8% sequentially and 0.3% year over year to $164.3 million. Mainly, lower inflation income received from the company’s inflation protected securities (TIPS) led to the sequential increase. However, these were somewhat mitigated by slightly lower rates on various interest bearing deposits.

Commerce Bancshares’ net interest margin in the third quarter stood at 3.51%, down 34 basis points (bps) sequentially and 24 bps year over year.

Non-interest income in the reported quarter inched up 0.2% from the previous quarter and 1.0% from the previous-year quarter to $101.6 million. The sequential growth was primarily driven by higher bank card transaction fees, deposit account charges and other fees as well as bond trading income.

Non-interest expense during the quarter upped 0.2% from the prior quarter but slipped 1.2% year over year to $153.7 million. The sequential rise was mainly attributable to higher salaries and employee benefits expenses.

Efficiency ratio in the quarter under review deteriorated to 58.71% from 57.40% in the prior quarter but improved from 59.58% in the year-ago quarter. The decline in efficiency ratio indicates improvement in profitability.

Credit Quality

The reported quarter saw considerable improvement in Commerce Bancshares’ credit quality. Provision for loan losses plunged from $12.2 million in the prior quarter and $21.8 million in the year-ago quarter to $11.4 million. Similarly, net charge-offs dropped 2.0% sequentially and 31.8% year over year to $14.9 million.

Additionally, total nonperforming assets declined to $99.7 million or 1.10% of loans outstanding from $103.3 million or 1.12% of loans outstanding at the prior-quarter end and $102.1 million or 1.05% of loans outstanding at the prior-year quarter end.

Though the allowance for loan losses was flat sequentially, it rose 3 bps year over year to 2.04% of total loans in the reported quarter.

Balance Sheet

Average loans (excluding loans held for sale) declined 1.9% quarter over quarter and 6.3% year over year to $9.09 billion. Both sequential and year-over-year declines reflected lower loan balances in all categories except real estate business.

Available for-sale investment securities (excluding fair value adjustments) hiked 10.0% from the prior quarter and 16.6% from the year-ago quarter to $8.25 billion. The increase was primarily driven by the purchase of mortgage-backed, other asset-backed and municipal securities during the quarter.

Total deposits scaled up 2.3% sequentially to $16.01 billion, reflecting growth in non-interest bearing demand and money market, offset partly by declines in certificate of deposit (CD) and interest checking accounts.

Capital Ratios

The quarter witnessed betterment in Commerce Bancshares’ capital ratios. As of September 30, 2011, the company’s return on assets (ROA) improved to 1.32% from 1.19% as of September 30, 2010. As of September 30, 2011, the company’s return on equity (ROE) also increased to 12.15% from 10.98% as of September 30, 2010.

Similarly, book value as of September 30, 2011 was $25.15 per share, up from $23.37 per share as of September 30, 2010.

Our Viewpoint

Despite the fact that the company has the scope to expand inorganically with its excellent liquidity position, we remain cautious on its loan volumes, which need to be improved in order to gain a foothold in the industry. However, the company’s direct retail and commercial-banking franchise are expected to post steady earnings.

One of the close competitors of Commerce Bancshares, TCF Financial Corporation (TCB) is expected to announce its third quarter results on October 20.

Commerce Bancshares currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our long-term "Neutral" recommendation on the shares.