On Thursday, Commerce Bancshares Inc. (CBSH) reported its third quarter 2010 earnings per share of 67 cents, slightly behind the Zacks Consensus Estimate of 68 cents. The earnings compare unfavorably with the prior quarter’s earnings of 71 cents but remain ahead of the year-ago quarter’s earnings of 63 cents.
The results for the reported quarter were affected by a decline in net interest income and non interest income, slightly offset by a decrease in non-interest expense. Also, the overall loan demand remained weak, which may affect the future interest income of the company.
Quarter in Detail
Net income was $55.9 million, up 8.3% from $51.6 million in the prior quarter, but down 6.4% from $59.7 million in the year-ago quarter.
Commerce Bancshares’ total revenue was $258.9 million, down from $264.7 million in the prior quarter and $265.6 million in the prior-year quarter. The company’s revenues also missed the Zacks Consensus Estimate of $268.0 million.
Taxable-equivalent net interest income fell 1.4% sequentially and 2.1% year over year to $164.8 million. The sequential decline was mainly a result of lower rates earned on the investment securities and average loans. This was partly offset by a lower interest expense on deposits and borrowings and higher average balances of investment securities.
Non-interest income was $99.5 million, down 2.1% from the prior quarter and 2.5% from the prior-year quarter. The year-over-year decrease was mainly due to a lower deposit account charges and other fees, consumer brokerage services and loan fees and sales, which was partially offset by a spike in bank card transaction fees and trust fees.
Non-interest expense in the quarter declined 0.6% from the prior quarter, but increased 0.4% year over year to $155.1 million. The sequential decline was due to fall in salaries and employee benefits, equipment costs, supplies and communication and deposit insurance, which was partially offset by increase in net occupancy fees.
Efficiency ratio in the reported quarter deteriorated to 59.51% from 58.48% in the prior quarter and 57.75% in the year-ago quarter.
Commerce Bancshares ended the quarter with 5,011 employees, compared with 5,051 employees at the end of June 30, 2010 and 5,148 employees at the end of September 30, 2009.
Credit Quality
Credit quality further improved during the quarter, following a similar pattern from the last quarter. Total non-performing assets declined to $102.1 million or 1.05% of loans outstanding from $103.2 million or 1.06% of loans outstanding at the end of the prior quarter and $129.2 million or 1.26% of loans outstanding at the end of the prior-year quarter.
Provision for loan losses dropped to $21.8 million, down 1.8% from $22.2 million in the prior quarter and 38.4% from $35.4 million in the year-ago quarter.
Net charge-offs decreased to $21.8 million from $22.2 million in the prior quarter and $30.9 million in the prior-year quarter. Sequential decrease in net charge-offs was mainly due to lower business real estate and revolving home equity loan losses, which was partially offset by an increase in construction loan losses of $1.5 million.
The allowance for loan losses rose to 2.04% of total loans, up 1 basis point (bps) from the prior quarter and 19 bps year over year.
Balance Sheet
Average loans (excluding loans held for sale) slashed 0.8% from the prior quarter and 7.2% year over year to $9.70 billion, reflecting lower loan balances in all categories except business and consumer credit card loans, which increased on an average by $37.2 million and $25.2 million, respectively.
Available for-sale investment securities (excluding fair value adjustments) were up 13.1% from the prior quarter and 25.5% year over year to $6.9 billion. The increase was primarily attributable to purchases of municipal, agency mortgage-backed and other asset-backed securities during the quarter.
Average deposits spiked up 0.7% sequentially and 3.8% year over year to $13.5 billion, primarily attributable to a growth in money market, business demand deposits and certificate of deposit (CD) accounts, partly offset by a decline in interest checking accounts.
Capital Ratios
As of September 30, 2010, Commerce Bancshares’ return on assets (ROA) declined to 1.19% from 1.33% as of June 30, 2010, but improved from 1.16% as of September 30, 2009. As of September 30, 2010, the company’s return on equity (ROE) fell to 10.98% from 12.21% as of June 30, 2010 and 11.49% as of September 30, 2009.
Book value as of September 30, 2010 was $24.54 per share, up from $23.85 per share as of June 30, 2010 and $22.33 per share as of September 30, 2009.
Our Take
Although Commerce Bancshares saw a decent improvement in credit quality, average loans decreased on a lower line of credit usage as well as a lower demand and pay-downs by business loan customers. Given the current economic conditions, we remain cautious on the company’s credit quality, loan volumes and non-performing asset positions, where improvement is necessary to gain a strong foothold in the industry.
Commerce Bancshares currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating indicating no directional pressure on the shares over the near term. Also, considering the fundamentals, we are maintaining our long-term Neutral recommendation on the shares.
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