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Shares of Commerce Bancshares, Inc. (CBSH - Analyst Report) have recorded a year-to-date return of 34.0%. Impressive organic growth, strong capital deployment activities, solid liquidity and strategic acquisitions were the driving factors behind this growth story. However, we are not confident that these factors will enhance further strength down the road as there will be considerable pressure on its bottom line owing to the sluggish economic recovery and stringent regulatory requirements.

After analyzing the company’s fundamentals following the third-quarter 2013 earnings release, we would suggest to stay invested in it. However, adding fresh shares of Commerce Bancshares to your investment portfolio may not be a good idea given the expected headwinds.  

Why This Stance?

Commerce Bancshares’ third-quarter 2013 earnings per share of 75 cents beat the Zacks Consensus Estimate by 3 cents. Also, earnings came in 3 cents higher than the prior-quarter earnings.

Better-than-expected results were driven by higher non-interest income and lower operating expense, partly offset by a fall in net interest income. Growth in loans and deposits were the tailwinds for the quarter. Moreover, capital and profitability ratios as well as credit quality were impressive and reflected the company’s financial strength.

Commerce Bancshares’ capital deployment activities reflect its efforts towards enhancing shareholder value. Apart from the regular quarterly cash dividend, the company declared a stock dividend. Moreover, it has an effective share repurchase program in place. As of Sep 30, 2013, there were about 3.5 million shares remaining under the current buyback authorization of 4.0 million shares.

However, Commerce Bancshares’ bottom-line growth is expected to be sluggish in the next few quarters due to its elevated operating expenses. Operating expenses increased 1.2% to $468.3 million for the nine months ended Sep 30, 2013 compared with the prior-year period. Moreover, regulatory pressure will significantly lower fees from overdraft and credit card transactions in the near to mid term.

The company has seen a mixed track record when it comes to estimate revisions and the Zacks Consensus Estimate has not been in a trend either. As a result, the company currently carries a Zacks Rank #3 (Hold). Over the last 30 days, the Zacks Consensus Estimate for 2013 and 2014 remained stable at $2.75 and $2.83 per share, respectively.

Other Stocks to Consider

If you are interested in Mid-West Banks, you may consider a few better-ranked stocks like First Interstate Bancsystem Inc. (FIBK - Snapshot Report), German American Bancorp Inc. (GABC - Snapshot Report) and Mainsource Financial Group (MSFG - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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