Commerce Bancshares Inc. (CBSH) reported its second quarter 2010 earnings per share of 71 cents, substantially ahead of the Zacks Consensus Estimate of 58 cents and significantly ahead of 53 cents in the prior quarter and 46 cents in the year-ago quarter.
Better-than-expected results in the reported quarter benefited from a decline in provision for loan losses, non-performing assets and net charges-offs, along with sound expense control. However, overall loan demand remained weak, which may affect the future interest income of the company.
Net income was $59.7 million, up from $44.2 million in the prior quarter and $37.0 million in the year-ago quarter.
Taxable-equivalent net interest income increased 0.2% from the prior quarter and 3.4% year over year to $167.8 million. Sequential increase was primarily due to lower interest costs on other borrowings and deposits, which was offset by a lower interest earned on investment securities and average loans.
Average loans (excluding loans held for sale) slashed 1.9% from the prior quarter and 9.7% year over year to $9.78 billion, reflecting lower loan balances in all categories except business loans, which increased on an average by $50.2 million. Available for-sale investment securities (excluding fair value adjustments) were up 0.03% from the prior quarter and 25.2% year over year to $6.1 billion.
Average deposits spiked up 3.1% sequentially and 2.3% year over year to $13.4 billion, primarily attributable to a growth in money market, business demand deposits and interest checking accounts.
Non-interest income was $101.6 million, up 8.9% from the prior quarter and 3.1% from the prior-year quarter. The year-over-year growth was mainly due to an increase in bank card transaction fees and trust fees, which was partially offset by a decline in deposit account charges, loan fees and sales and bond trading income.
Non-interest expense for the quarter almost remained flat compared to the prior quarter but fell 2.5% year over year to $156.0 million. Apart from reductions in supplies and communication and equipment costs, the decrease was mainly due to a decline of $8.0 million in Federal Deposit Insurance Corporation (FDIC) insurance costs.
Provision for loan losses declined to $22.2 million compared to $34.3 million in the prior quarter and $41.2 million in the year-ago quarter. Efficiency ratio in the reported quarter deteriorated to 58.48% compared with 60.49% for the prior quarter and 62.15% for the year-ago quarter.
Commerce Bancshares ended the quarter with 5,051 employees, compared with 5,094 employees at the end of March 31, 2010 and 5,181 employees at the end of June 30, 2009.
Credit metrics decreased further during the quarter, following a similar pattern from the last quarter. Total non-performing assets declined to $103.2 million or 1.06% of loans outstanding compared with $110.1 million or 1.12% of loans outstanding at the end of the prior quarter and $131.7 million or 1.23% of loans outstanding at the end of the prior-year quarter.
Net charge-offs decreased to $22.2 million, compared with $31.3 million in the prior quarter and $36.0 million in the prior-year quarter. Sequential decrease in net charge-offs was mainly the result of a decline in consumer banking, construction loans and consumer credit card loans. The allowance for loan losses rose to 2.03% of total loans, up 3 basis points (bps) from the prior quarter and 29 bps year over year.
At June 30, 2010, Commerce Bancshares’ return on assets (ROA) and return on equity (ROE) improved to 1.33% from 1.00% and to 12.21% from 9.32%, respectively, at March 31, 2010 and 0.84% and 8.91%, respectively, at June 30, 2009. Book value as of June 30, 2010 was $23.85 per share, up from $23.13 per share as of March 31, 2010 and $20.99 per share as of June 30, 2009.
Although Commerce Bancshares saw a decent growth in net interest income and improvement in credit quality, average loans decreased on a lower line of credit usage as well as lower demand and pay-downs by business loan customers. Given the current economic conditions, we remain cautious on Commerce Bancshares’ credit quality, loan volumes and non-performing asset positions, where improvement is necessary to gain a strong foothold in the industry.
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