Commerce Bancshares (CBSH) reported its 2Q09 earnings at $37.0 million or $0.48 per diluted share, compared to $30.8 million or $0.40 per diluted share in the prior quarter. The results were three pennies ahead of our estimate. The results benefitted from improvement in both spread and fee income.
Taxable-equivalent net interest income for 2Q09 increased 5.4% sequentially and 9.3% year-over-year to $162.3 million. The increase over the previous quarter was primarily the result of higher average balances of investment securities, coupled with lower rates paid on deposits.
Average loans decreased 2.4% sequentially and 1.4% year-over-year to $10.8 billion. Available for-sale investment securities (excluding fair value adjustments) increased by $1.1 billion sequentially to $4.9 billion. Average deposits increased 4.9% sequentially and 13.5% year-over-year to $14.0 billion.
Non-interest income came in at $98.6 million, up 6.6% sequentially but down 4.1% compared to prior-year quarter. Non-interest expense for the quarter increased 4.7% sequentially and 8.8% year-over-year to $160.0 million. Non-interest expense for the current quarter included costs for an FDIC special assessment of $8.0 million. Excluding this item, non-interest expense for the quarter declined slightly from the prior quarter but increased 3.3% over the prior-year quarter.
Credit metrics deterioratedfurther during the quarter, with total non-performing assets rising to $131.7 million or 1.23% of loans outstanding compared with $118.7 million or 1.08% of loans outstanding at the end of the prior quarter, while net charge-offs increased to $36.0 million compared to $34.9 million in the prior quarter and $14.5 million in the prior-year quarter.
The sequential increase in net charge-offs was mainly the result of increase in consumer credit card and construction loan losses. The allowance for loan losses increase to 1.74% of total loans, up 9 bps sequentially and 43 bps year-over-year.
For the three months ended June 30, 2009, ROA and ROE improved to 0.84% and 8.91%, respectively, from 0.73% and 7.82% for the three months ended March 31, 2009. Book value as on June 30, 2009 was $22.04 per share, up from $21.19 per share on March 31, 2009 and $21.30 per share on June 30, 2008.
After reviewing the results, we are revising our FY09 and FY10 estimates to $1.82 per share and $2.25 per share respectively, and maintaining our Hold recommendation on the shares.
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