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Shares of Commerce Bancshares, Inc. (CBSH - Analyst Report) fell nearly 2.2% as the company reported a negative surprise of 2.9% in its third-quarter 2016 earnings release. Earnings of 68 cents per share lagged the Zacks Consensus Estimate of 70 cents. However, the figure reflects a 7.9% rise from the year-ago period.

The quarter witnessed an increase in expenses, which was partially offset by a rise in net interest income and non-interest income, and a fall in provisions. Nonetheless, 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 $66.3 million, up 6.3% year over year.


Revenues Lag While Expenses Escalate

Total revenue was $290.6 million, an increase of 6.3% year over year. However, the figure lagged the Zacks Consensus Estimate of $294 million.

Net interest income increased 5.7% year over year to $171.2 million. The rise reflected higher interest income, partially offset by a growing interest expense.

Non-interest income summed $119.3 million, up 7.2% year over year. The increase was driven by an improvement in all the components except consumer brokerage services.

Non-interest expenses rose 5.7% year over year to $181.2 million triggered by a rise in all the expense components except other non-interest expense.

Efficiency ratio for the quarter declined to 62.25%, from 62.55% in the prior-year quarter. A fall in efficiency ratio indicates higher profitability.

A Strong Balance Sheet

As of Sep 30, 2016, total loans summed $13.2 billion, up 1.1% sequentially, while total deposits came in at $20.2 billion, almost in line with the prior month.

Further, total stockholder’s equity was $2.6 billion as of Sep 30, 2016, an increase of 1.3% from the previous month.

Credit Quality Depicted Strength

Allowance for loan losses, as a percent of total loans, was 1.17%, down 7 basis points (bps) year over year. Further, net loan charge-offs to average loans ratio (annualized) declined 8 bps year over year to 0.20%.

Moreover, provision for loan losses declined 13.2% year over year to $7.3 million.

Sound Capital Position vs a Blended Profitability Picture

As of Sep 30, 2016, Tier I leverage ratio stood at 9.58%, rising 27 bps year over year. Moreover, tangible common equity to tangible assets ratio grew 50 bps year over year to 9.22%.

Further, the company’s return on average assets improved 3 bps year over year to 1.12% as of Sep 30, 2016, while return on average common equity came down 28 bps year over year to 10.97%.

Nonetheless, book value per common share came in at $25.01, climbing 9.5% year over year.

Our Take

Commerce Bancsharesis 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.

However, the company’s 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, elevated expense level and stringent regulations continue to hamper bottom-line growth.

COMMERCE BANCSH Price, Consensus and EPS Surprise

COMMERCE BANCSH Price, Consensus and EPS Surprise | COMMERCE BANCSH Quote

Currently, Commerce Bancshares carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other banks, Associated Banc-Corp (ASB - Analyst Report) and SVB Financial Group (SIVB - Analyst Report) will announce results on Oct 20, while Capital One Financial Corporation (COF - Analyst Report) is scheduled to announce its results on Oct 25.

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