Shares of Commerce Bancshares, Inc. (CBSH) declined nearly 5% in the day’s trading following its third-quarter 2014 earnings release before the opening bell on Oct 15. The fall, coming in spite of an earnings beat, was mainly on expense worries. The company reported earnings per share of 72 cents, beating the Zacks Consensus Estimate by a penny. It also came in a cent higher than the year-ago figure

Better-than-expected results were mainly driven by higher revenues, partially offset by an increase in both non-interest expenses and provision for loan losses. Further, growth in loans and deposits acted as tailwinds. However, while credit quality and profitability ratios were a mixed bag, capital ratios deteriorated during the quarter.

Net income available to common shareholders was $66.4 million, down 2.7% year over year.

Commerce Bancshares, Inc - Earnings Surprise | FindTheBest

Performance in Detail

Commerce Bancshares’ total revenue was $267.0 million, up 2.3% year over year but below the Zacks Consensus Estimate of $273.0 million.

Taxable equivalent net interest income was $161.8 million, inching up 0.5% from the year-ago quarter. Non-interest income came in at $112.3 million, up 5.6% year over year, driven by a rise in bank card transaction, trust fees, consumer brokerage services and other fees.

Non-interest expenses rose 3.8% year over year to $162.2 million. The increase was mainly a result of higher salaries and employee benefits, net occupancy, equipment, marketing, deposit insurance costs and other expenses. These were, however, partially offset by a fall in supplies and communication, and data processing & software.

Commerce Bancshares’ efficiency ratio increased to 60.56% from 59.72% in the prior-year quarter. An increase in efficiency ratio implies a fall in profitability.

Commerce Bancshares’ total loans improved 5.7% year over year to $11.4 billion as of Sep 30, 2014. Additionally, total deposits rose 2% year over year to $18.6 billion.

Credit Quality

In the reported quarter, credit quality reflected a mixed bag. Total non-performing assets came in at $53.0 million, up 18.2% year over year. However, allowance for loan losses, as a percentage of total loans was 1.41%, down 10 basis points (bps) from the prior-year quarter.

Net loan charge-offs increased 15.1% year over year to $7.7 million. During the reported quarter, provision for loan losses, increasing 84.6% year over year, matched net loan charge-offs.

Capital and Profitability Ratios

Commerce Bancshares’ capital ratios deteriorated while profitability ratios were a mixed bag. As of Sep 30, 2014, Tier I leverage ratio came in at 9.37%, down from 9.43% at the end of the prior-year quarter. Tangible common equity to assets ratio as of Sep 30, 2014 was 8.85%, decreasing from 9.10% as of Sep 30, 2013.

The company’s return on average assets was 1.20%, down from 1.26% as of Sep 30, 2013. Return on average equity decreased to 12.30% from 12.69% as of Sep 30, 2013.

However, book value per common share was $23.38 as of Sep 30, 2014, up from $22.77 as of Sep 30, 2013.

Our Viewpoint

Despite mounting non-interest expenses, increase in loans and deposits remain a positive for the company, going forward. However, a low interest rate environment, sluggish economic recovery and stringent regulations will continue to weigh on its top line in the quarters ahead.

Nevertheless, given its stable capital base and solid liquidity, we remain optimistic about Commerce Bancshares’ inorganic growth plans and efficient capital deployment activities.

Commerce Bancshares currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Among other Midwest banks, Huntington Bancshares Inc. (HBAN) is slated to report results on Oct 17, while both Old National Bancorp. (ONB) and Chemical Financial Corporation (CHFC) are scheduled to report on Oct 27.

Read the Full Research Report on HBAN
Read the Full Research Report on CBSH
Read the Full Research Report on ONB
Read the Full Research Report on CHFC


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