Commerce Bancshares Tops Estimates


Commerce Bancshares Inc. (NasdaqGS:CBSH - News) reported fourth-quarter 2011 earnings of 73 cents per share, ahead of the Zacks Consensus Estimate of 70 cents. However, after considering litigation settlement charges related to debit overdraft fees, Visa Inc. (NYSE:V - News) indemnification obligation costs and losses on held-for-sale real estate property, the company reported earnings per share of 69 cents.

Though the quarterly result compare unfavorably with the prior quarter’s earnings of 72 cents per share, it is ahead of the year-ago quarter’s earnings of 67 cents.

For the full year 2011, Commerce Bancshares recorded earnings per share of $2.82 compared with $2.40 in 2010. However, the earnings missed the Zacks Consensus Estimate of $2.85.

Commerce Bancshares’ fourth quarter year-over-year results benefited from higher net interest income and a drop in operating expenses, which was partially offset by lower fee income. Moreover, the company’s credit quality and capital ratios showed improvement. However, weak loan demand and low interest rates dragged down the average loans.

Net income for the quarter was $61.5 million, down 6% sequentially from $65.4 million and 0.6% year over year from $61.9 million. For fiscal 2011, net income stood at $256.3 million versus $221.7 million in 2010.

Quarter in Detail

Commerce Bancshares’ quarterly revenues were $262.0 million, down from $265.9 million in the prior quarter and $276.5 million in the prior-year quarter. However, total revenues were marginally ahead of the Zacks Consensus Estimate of $261.0 million.

For 2011, total revenue came in at $1.06 billion, dipping 0.8% from $1.07 billion in 2010 and at par with the Zacks Consensus Estimate.

Commerce Bancshares’ quarterly taxable-equivalent net interest income grew 2.2% sequentially and 1.2% year over year to $167.9 million. The improvement was driven by strong core deposit growth. Net interest margin in the fourth quarter stood at 3.44%, down 7 basis points (bps) sequentially and 39 bps year over year.

Non-interest income in the quarter fell 7.5% from the previous quarter and 14.9% from the previous-year quarter to $94.0 million. The decline was primarily attributable to lower debit interchange fees due to the impact of Durbin Amendment as well as reduction in gains on student loan sales.

Non-interest expense during the quarter surged 1.5% from the prior quarter but dipped nearly 5% year over year to $156.0 million. The sequential rise was mainly attributable to higher salaries and employee benefits expenses.

Efficiency ratio in the quarter under review deteriorated to 60.71% from 58.71% in the prior quarter and 60.33% in the year-ago quarter. The increase in efficiency ratio implies a decline in profitability.

Credit Quality

The fourth quarter witnessed considerable year-over-year improvement in Commerce Bancshares’ credit quality. Total nonperforming assets declined to $93.8 million or 1.02% of loans outstanding from $99.7 million or 1.10% at the end of the prior-quarter and $97.3 million or 1.03% at the end of the prior-year quarter.

Further, the allowance for loan losses as a percentage of total loans was 2.01% compared with 2.07% in the prior quarter and 2.10% in the previous-year quarter.

Moreover, provision for loan losses increased from $11.4 million in the prior quarter but slipped from $21.6 million in the year-ago quarter to $12.1 million. Similarly, net charge-offs increased 5.1% sequentially but declined 27.7% year over year to $15.6 million.

Balance Sheet

Average loans (excluding loans held for sale) grew marginally quarter over quarter but dropped 2.6% year over year to $9.11 billion. Both sequential rise reflected higher loan balances in all categories except construction business.

Total average deposits scaled up 4.2% sequentially to $11.2 billion, reflecting growth in non-interest bearing demand and money market, partly offset by declines in certificate of deposit (:CD).

Capital Ratios

The year saw betterment in Commerce Bancshares’ capital ratios. As of December 31, 2011, the company’s return on assets (:ROA) improved to 1.32% from 1.22% as of December 31, 2010. As of December 31, 2011, the company’s return on equity (:ROE) also climbed to 12.15% from 11.15% as of December 31, 2010.

Similarly, book value as of December 31, 2011 was $24.40 per share, up from $22.25 per share as of December 31, 2010.

Peer Performance

Concurrently one of Commerce Bancshares peers, TCF Financial Corporation (NYSE:TCB - News) reported fourth-quarter 2011 earnings of 10 cents per share, lagging the Zacks Consensus Estimate by 4 cents. The results were impacted by lower top line growth, driven by reduced net interest and non-interest income. These negatives were partly offset by deposits growth and declining non-performing assets.

Our Viewpoint

Despite the fact that Commerce Bancshares has the scope to expand inorganically with its excellent liquidity position, we remain cautious on its loan volumes that need to be improved in order to gain a foothold in the industry. Further, the recent financial regulations will have a negative impact on revenue and will lead to increased compliance and litigation expenses. However, the company’s direct retail and commercial-banking franchise are expected to post steady earnings.

Commerce Bancshares currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our long-term "Neutral" recommendation on the shares.

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