Backed by growth in net interest income, Commerce Bancshares, Inc. (CBSH Quick QuoteCBSH - Free Report) reported a positive surprise of 2.9% in its second-quarter 2016 earnings release. Earnings of 70 cents per share surpassed the Zacks Consensus Estimate of 68 cents. However, the figure reflects a 1.4% decline from the year-ago period.

The quarter witnessed an increase in expenses and provisions, but they were more than offset by a rise in net interest income and non-interest income. Further, an impressive growth in loans and deposits helped the company manage the adverse effects of a low interest rate environment, to some extent.

Net income available to the common shareholders in the reported quarter was $67.6 million, down 6.2% year over year.

Revenues Lag While Expenses Escalate

Total revenue was $288.4 million, an increase of 1.3% year over year. However, the figure lagged the Zacks Consensus Estimate of $291.8 million.

Net interest income increased about 5% year over year to $171.8 million. The rise reflected higher interest income, partially offset by a growing interest expense.

Non-interest income summed $116.6 million, up 2% year over year. The increase was driven by the improvement in trust fees, deposit account charges & other fees and loan fees & sales, partially offset by the fall in bank card transaction fees, capital market fees, consumer brokerage services and other income.

Non-interest expenses rose 7% year over year to $177.1 million triggered by a rise in all the expense components.

Efficiency ratio for the quarter rose to 61.27%, from 59.39% in the prior-year quarter. A rise in efficiency ratio indicates lower profitability.

A Strong Balance Sheet

As of Jun 30, 2016, total loans summed $13.1 billion, up 9.8% year over year, while total deposits came in at $20.2 billion, a rise of 4.5% year over year.

Further, total stockholder’s equity reported a figure of $2.5 billion as of Jun 30, 2016, an increase of 9.2% year over year.

Credit Quality: A Mixed Bag

Allowance for loan losses, as a percent of total loans, was 1.18%, down 9 basis points (bps) year over year. Further, net loan charge-offs to average loans ratio (annualized) declined 6 bps year over year to 0.30%.

However, provision for loan losses surged 36.4% year over year to $9.2 million.

Sound Capital Position vs a Blended Profitability Picture

As of Jun 30, 2016, Tier I leverage ratio stood at 9.36%, rising 28 bps year over year. Moreover, tangible common equity to tangible assets ratio grew 51 bps year over year to 9.09%.

However, the company’s return on average assets declined 11 bps year over year to 1.15% as of Jun 30, 2016, while return on average equity came down 1.22% year over year to 11.69%.

Nonetheless, book value per common share came in at $24.67, climbing 11.4% year over year.

Our Take

Commerce Bancshares’ significant exposure to residential mortgage, construction and land development as well as commercial real estate loans can pose a problem in the near term.

Further, the impact of the prevailing low rates on Commerce Bancshares’ financials remains a matter of concern. Also, elevated expense level and stringent regulations continue to hamper bottom-line growth.

However, the company is well positioned to capitalize on inorganic growth opportunities, given a strong capital base and healthy liquidity level. Also, the company’s initiatives in the mortgage banking area are expected to boost fee generation going forward.
 

Currently, Commerce Bancshares carries a Zacks Rank #4 (Sell).

Among other banks, Capital One Financial Corporation (COF Quick QuoteCOF - Free Report) and SVB Financial Group will announce results on Jul 22, while Enterprise Financial Services Corp. (EFSC Quick QuoteEFSC - Free Report) is scheduled to announce its result on Jul 28.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>