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Commerce Bancshares, Inc.’s (CBSH - Analyst Report) first-quarter 2013 earnings of 67 cents per share missed the Zacks Consensus Estimate by a penny. Further, the earnings were below 72 cents reported in the prior quarter and 70 cents in the prior-year quarter.

Marginally lower-than-expected results were attributable to lower top-line growth, partially offset by fall in operating expenses. Further, capital and profitability ratios deteriorated. Yet, marked improvement in credit quality as well as sustained growth in loans and deposits was the tailwind.

Net income for the quarter was $61.0 million, down 8.7% from $66.6 million in the last quarter.

Performance in Details

Commerce Bancshares’ total revenue was $258.6 million, down 5.4% from the prior quarter.  Moreover, total revenue was 0.9% below the Zacks Consensus Estimate of $261.0 million.

Taxable equivalent net interest income was $156.7 million, down 6.9% sequentially. The decrease was largely attributable to lower inflation interest on the company's inflation-protected securities and the absence of a special dividend received on a private equity investment in the previous quarter.

Non-interest income fell 3.3% from the previous quarter to $99.9 million for Commerce Bancshares. The decline was mainly due to a decrease in bank card transaction fees as well as reduced deposit account charges and other fees, partially offset by an increase in trust fees, capital market fees, consumer brokerage fees as well as loan fees and sales.

Non-interest expense fell 2.0% from the prior quarter to $155.0 million for Commerce Bancshares. The drop was mainly attributable to lower salaries and employee benefits costs, supplies and communication expenses, equipment costs and net occupancy. These were partly mitigated by higher marketing costs, deposit insurance, data processing expenses as well as other expenditure.
    
Commerce Bancshares’ efficiency ratio deteriorated to 61.76% from 59.62% in the prior quarter. The increase implies a fall in profitability.

Credit Quality

Commerce Bancshares witnessed an improvement in credit quality during the quarter. Total nonperforming assets came in at $58.9 million, down 9.1% sequentially. Further, allowance for loan losses as a percentage of total loans was 1.68%, down 7 basis points from the prior quarter.

Moreover, net charge-offs plummeted 27.7% sequentially to $7.8 million for Commerce Bancshares. Likewise, provision for loan losses fell 60.5% from the previous quarter to $3.3 million, mainly due to decline in commercial loan losses.

Balance Sheet

Commerce Bancshares’ average loans (excluding loans held for sale) improved 2.6% from the prior quarter to $9.9 billion. Further, total deposits inched up 0.9% sequentially to $18.5 billion, reflecting growth in time open and certificate of deposits (CD).

Capital and Profitability Ratios

Commerce Bancshares’ capital and profitability ratios continued to deteriorate in the reported quarter. As of Mar 31, 2013, tier I leverage ratio came in at 8.92%, down from 9.14% in the prior quarter. Tangible common equity to assets ratio as of Mar 31, 2013 was 9.26%, up from 9.25% as of Dec 31, 2012.

The company’s return on average assets was 1.13% compared with 1.25% as of Dec 31, 2012. Similarly, return on average equity decreased to 11.38% from 11.62% as of Dec 31, 2012.

However, book value, based on total equity as of Mar 31, 2013, was $24.02 per share, up from $23.76 as of Dec 31, 2012.

Share Repurchase

During the quarter, Commerce Bancshares repurchased 808,000 shares at an average price of $37.13 per share.
 
Our Viewpoint

With strong capital base and excellent liquidity, Commerce Bancshares is well- positioned for expansion through acquisitions. Further, the company’s focus on developing in the high-growth areas and its efforts to contain expenses is expected to prove accretive to the overall growth going forward.

However, existing low interest rates, declining loan demands coupled with slow economic recovery are anticipated to hamper the overall performance of the company in the near term. In addition, the current financial rules proposed by the Federal Reserve and the stringent regulatory settings are matters of concern for the company.

Among other Midwest banks, Huntington Bancshares Incorporated (HBAN - Analyst Report) is scheduled to report on Apr 17, Associated Banc-Corp (ASBC - Analyst Report) on Apr 18 and First Interstate Bancsystem Inc. (FIBK - Snapshot Report) on Apr 22.

Commerce Bancshares currently retains a Zacks Rank #3 (Hold).

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