Commerce Bancshares Inc. (CBSH) reported its first quarter 2010 earnings of $44.2 million or 53 cents per share, compared with $49.6 million or 60 cents per share in the prior quarter and $30.8 million or 38 cents per share in the year-ago period. The results in the reported quarter were in line with the Zacks Consensus Estimate. Results benefited from a decline in loan loss provisions and non-performing assets along with sound expense control. However, loan demand and credit quality continued to remain weak.
 
Taxable-equivalent net interest income in the reported quarter increased 8.8% year over year but declined 1.2% from the prior quarter to $167.5 million. The decline was primarily the result of lower average balances of investment securities that was offset by lower rates on deposits.
 
Average loans (excluding loans held for sale) decreased 1.9% from the prior quarter and 10.1% year over year to $9.97 billion, reflecting lower line of credit usage, continued weak demand and lower pay-downs by business loan customer. Available for-sale investment securities (excluding fair value adjustments) increased $27.3 million from the prior quarter to $6.1 billion. Average deposits decreased 2.1% sequentially but increased 5.2% year over year to about $13 billion.
 
Non-interest income was $93.3 million, up1.0% from prior-year quarter but down 9.9% from prior quarter. Non-interest expense for the quarter increased 0.7% over prior quarter and 1.9% year over year to $155.8 million due to higher costs for data processing and software coupled by higher salaries and benefits. Non-interest expense in the reported quarter included costs special assessment of $4.8 million for Federal Deposit Insurance Corporation (FDIC).
 
Commerce Bancshares ended the reported quarter with 5,094 employees, compared with 5,222 employees at the end of Mar 31, 2009.
 
Credit metrics deteriorated further during the quarter, with total non-performing assets rising to $110.1 million or 1.12% of loans outstanding compared with $116.7 million or 1.15% of loans outstanding at the end of the prior quarter.
 
Net charge-offs decreased to $31.3 million, compared with $37 million in the prior quarter and $34.9 million in the prior-year quarter. The decrease in net charge-offs was mainly the result of a decline in consumer banking and real estate losses. The allowance for loan losses increased to 2.01% of total loans, up 9 basis points (bps) from the prior quarter and 36 bps year over year.
 
At Mar 31, 2010, Commerce Bancshares’ return on assets (ROA) and return on equity (ROE) improved to 1.00% and 9.32%, respectively, from 0.73% and 7.82%, respectively at Mar 31, 2009. Book value as of Mar 31, 2010 was $23.13 per share, up from $22.72 per share as of Dec 31, 2009 and $20.18 per share as of Mar 31, 2009.
          
Dividend Update
 
On Feb 5, 2010, Commerce Bancshares announced that its Board of Directors has declared a regular quarterly dividend of $0.2350 per share on the company’s common stock. The dividend was paid on Mar 26, 2010 to stockholders of record as on Mar 10, 2010. The current dividend yield is 2.28%.
 
Although Commerce Bancshares saw a decent growth in net interest income, credit metrics continued to deteriorate. Average loans decreased on a lower line of credit usage as well as lower demand and pay-downs by business loan customers. Overall, the year-over-year decrease in efficiency ratio reflects modest expense management even during a fragile economy. Given the current market volatility, we remain cautious on Commerce Bancshares’ credit quality, loan volumes and non-performing asset positions, where improvement is necessary for a firm foothold in the industry.
 
On Thursday, the shares of Commerce Bancshares closed at $41.21, down 1.3%, on the Nasdaq Stock Exchange.
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