Commerce Bancshares Misses on Earnings, Revs - Analyst Blog

Commerce Bancshares, Inc.'s CBSH first-quarter 2014 earnings per share of 67 cents missed the Zacks Consensus Estimate by a penny. However, the figure marked an increase of 6.3% from 63 cents earned in the prior-year quarter.

Commerce Bancshares' intraday stock price movement following the earnings release on Thursday reflected negative market sentiment. The stock closed at $43.07, declining 5.6% from the previous day. However, to understand the impact of the earnings release more appropriately, we will have to observe the stock price movement for some more time.

Lower-than-expected results were mainly due to higher operating expenses, partially offset by a slight rise in revenues. However, growth in loans and deposits as well as strong capital and profitability ratios were acted as tailwinds, while credit quality was a mixed bag.

Net income was $64.3 million, up 5.4% year over year.

Performance in Detail

Commerce Bancshares' total revenue was $262.6 million, up 1.5% year over year. The reported figure came short of the Zacks Consensus Estimate of $267.0 million.

Taxable equivalent net interest income was $159.8 million, up 1.9% from the year-ago quarter. Also, non-interest income was $102.6 million, up 2.8% year over year driven primarily by a rise bank card transaction fees and trust fees.

Non-interest expense rose 4.7% year over year to $162.3 million. The increase was mainly due to higher salaries and employee benefits, net occupancy costs, supplies and communication expenses, data processing and software expenditure, marketing costs, deposit insurance costs and other expenses. These were partially offset by lower equipment costs.

Commerce Bancshares' efficiency ratio deteriorated to 63.28% from 61.76% in the prior-year quarter. An increase in efficiency ratio implies a fall in profitability.

Commerce Bancshares' total loans improved 12.4% year over year to $11.2 billion as of Mar 31, 2014. Additionally, total deposits rose 3.9% year over year to $19.2 billion.

Credit Quality

In the reported quarter, credit quality reflected a mixed bag. Total nonperforming assets came in at $54.4 million, down 7.6% year over year. Further, allowance for loan losses as a percentage of total loans was 1.44%, down 24 basis points from the prior-year quarter.

However, net loan charge-offs increased 24.1% year over year to $9.7 million. Likewise, provision for loan losses increased significantly from the prior-year quarter to $9.7 million.

Capital and Profitability Ratios

Commerce Bancshares' capital ratios and profitability ratios improved. As of Mar 31, 2014, Tier I leverage ratio came in at 9.41%, up from 8.92% in the prior-year quarter. Tangible common equity to assets ratio as of Mar 31, 2014 was 9.36%, increasing from 9.26% as of Mar 31, 2013.

The company's return on average assets was 1.16%, up from 1.13% as of Mar 31, 2013. Return on average equity increased to 11.56% from 11.38% as of Mar 31, 2013.

Further, book value, based on total equity was $23.75 per share as of Mar 31, 2014, up from $22.87 as of Mar 31, 2013.

Our Viewpoint

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

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

At present, Commerce Bancshares has a Zacks Rank #3 (Hold).

Among other Midwest banks, Huntington Bancshares Inc. HBAN, PrivateBancorp, Inc. PVTB and Old National Bancorp. ONB are slated to report results on Jan 16, Jan 17 and Jan 28, respectively.