Commerce Bancshares Inc. (CBSH) reported its second quarter 2011 earnings per share of 79 cents, beating the Zacks Consensus Estimate of 72 cents. The result also compared favorably with the prior quarter’s earnings of 69 cents and the year-ago quarter’s earnings of 68 cents.
A growth in net interest income (NII) and non-interest income, as well as lower non-interest expenses, accounted for the upbeat performance. The company’s capital ratios continued to improve. However, credit quality showed mixed results, with nonperforming assets increasing, while net charges-offs declining.
Commerce Bancshares’ net income for the quarter was $69.0 million, up 14.2% sequentially from $60.5 million and 15.6% year over year from $59.7 million. The year-over-year improvement ensued from a constant focus on expense management, a strong fee income growth and a lower loan loss provision.
Quarter in Detail
Commerce Bancshares’ quarterly total revenues were $266.1 million, up from $256.9 million in the prior quarter and $264.6 million in the prior-year quarter. The company’s revenues also surpassed the Zacks Consensus Estimate of $265.0 million.
Quarterly taxable-equivalent NII inched up 2.6% sequentially and 1.8% year over year to $170.8 million. Mainly, lower rates paid on deposits, lower average balances on Federal Home Loan Bank (FHLB) advances, and a growth in interest income on investment securities led to the sequential increase. However, these positives were somewhat mitigated by lower rates earned on mortgage-backed and asset-backed securities.
Commerce Bancshares’ net interest margin in the first quarter stood at 3.85%, flat sequentially but down 12 basis points (bps) year over year.
Non-interest income in the reported quarter improved 5.7% from the previous quarter but slipped 0.1% from the previous-year quarter and stood at $101.3 million. The sequential growth was primarily driven by higher bank card transaction fees, trust fees, deposit account charges and other fees, bond trading income and consumer brokerage services.
Non-interest expense in the quarter fell 0.3% from the prior quarter and 1.5% year over year to $153.5 million. The drop was mainly due to lower salaries and employee benefits expenses.
Efficiency ratio in the quarter under review improved to 57.40% from 59.64% in the prior quarter and 58.45% in the year-ago quarter. The decline in efficiency ratio indicates improvement in profitability.
Credit Quality
Credit quality was a mixed bag during the quarter. Provision for loan losses dropped from $15.8 million in the prior quarter and $22.2 million in the year-ago quarter to $12.2 million. Net charge-offs dropped 19.2% sequentially and 31.5% year over year to $15.2 million.
However, total nonperforming assets increased to $103.3 million or 1.12% of loans outstanding from $103.0 million or 1.10% of loans outstanding at the prior-quarter end and $103.2 million or 1.06% of loans outstanding at the prior-year quarter end.
The allowance for loan losses declined 1 bp sequentially but rose 5 bps year over year and stood at 2.07% of total loans.
Balance Sheet
Average loans (excluding loans held for sale) inched down 1.9% quarter over quarter and 9.9% year over year to $9.26 billion. The year-over-year decline reflected lower loan balances in all categories except real estate loans.
Available for-sale investment securities (excluding fair value adjustments) hiked 2.6% from the prior quarter and 19.4% from the year-ago quarter to $7.50 billion. The increase was primarily driven by the purchases of mortgage-backed and other asset-backed securities during the quarter.
Average deposits spiked 1.9% sequentially to $14.38 billion, reflecting a growth in non-interest bearing demand and money market, offset partly by a decline in certificate of deposit (CD) accounts.
Capital Ratios
The quarter witnessed a betterment in Commerce Bancshares’ capital ratios. As of June 30, 2011, the company’s return on assets (ROA) improved to 1.47% from 1.33% as of June 30, 2010. As of June 30, 2011, the company’s return on equity (ROE) also increased to 13.12% from 12.21% as of June 30, 2010.
Similarly, book value as of June 30, 2011 was $24.55 per share, up from $22.72 per share as of June 30, 2010.
Stock Repurchase
During the quarter, Commerce Bancshares purchased 343,270 shares of treasury stock at an average cost of $40.87 through its previously approved treasury stock buyback plan.
Our Viewpoint
Although Commerce Bancshares saw an improvement in credit quality, average loans declined on a lower line of credit usage. Given the current economic conditions, we remain cautious on the company’s nonperforming asset positions and loan volumes, which need to improve further in order to gain a foothold in the industry.
One of the close competitors of Commerce Bancshares, Wintrust Financial Corporation (WTFC) is expected to announce its second quarter results on July 20.
Commerce Bancshares currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our long-term ‘Neutral’ recommendation on the shares.
COMMERCE BANCSH (CBSH): Free Stock Analysis Report
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