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On Aug 26, 2013, we reaffirmed our Neutral recommendation on Commerce Bancshares, Inc. (CBSH - Analyst Report). This was based on the company’s positive second-quarter 2013 results, but we remain concerned about persistently rising expenses.

Why Neutral?

On Jul 11, Commerce Bancshares reported second-quarter 2013 earnings of 72 cents per share, in line with the Zacks Consensus Estimate. Earnings were primarily driven by top-line growth, partially offset by higher operating expenses. Consistent growth in loans, along with steady capital and profitability ratios added to the company’s strong financials. However, a drop in total deposits was the downside.

The Zacks Consensus Estimate for 2013 advanced 0.7% to $2.86 per share over the last 60 days. Further, for 2014, the Zacks Consensus Estimate increased 0.7% to $2.93 per share over the same time period. As a result, Commerce Bancshares currently carries a Zacks Rank #3 (Hold).

Commerce Bancshares’ sound capital base and solid liquidity help it to effectively deploy its capital, thereby making it an attractive pick for income-seeking investors. Moreover, recently the company entered into an agreement to acquire Summit Bancshares, thereby expanding its footprints to newer markets.

However, owing to the present interest rate scenario, significant improvement in net interest income (NII) is not expected in the near term. Further, higher expenses, exposure to real estate loans, overall volatile market conditions and stringent regulatory requirements are plausible concerns.

Other Stocks Worth Considering

Some better performing banks include First Interstate Bancsystem Inc. (FIBK - Snapshot Report), Firstbank Corp. (FBMI - Snapshot Report) and Mercantile Bank Corp. (MBWM - Snapshot Report). All these stocks carry a Zack’s Rank #1 (Strong Buy).

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