Shares of Commerce Bancshares, Inc. (CBSH) suffered a fall owing to expense worries, following its second-quarter 2014 earnings release. The company reported earnings per share of 70 cents, beating the Zacks Consensus Estimate of 68 cents and up from 69 cents earned in the prior-year quarter.
Our proven model had also predicted that Commerce Bancshares will post an earnings beat as it had the right combination of two key ingredients – a positive Earnings ESP and a favorable Zacks Rank #2 (Buy).
Better-than-expected results were mainly driven by higher revenues, though partially offset by an increase in both non-interest expenses and provision for loan losses. Further, growth in loans and deposits acted as tailwinds. However, credit quality, capital ratios and profitability ratios were mixed bags.
Net income was $66.5 million, up 1.1% year over year.
Performance in Detail
Commerce Bancshares’ total revenue was $276.7 million, up 3.0% year over year and above the Zacks Consensus Estimate of $269.0 million.
Taxable equivalent net interest income was $167.9 million, climbing 1.2% from the year-ago quarter. Non-interest income came in at $108.8 million, up 5.9% year over year, driven primarily by a rise in bank card transaction and trust fees.
Non-interest expenses rose 3.8% year over year to $162.9 million. The increase was mainly due to higher salaries and employee benefits, deposit insurance costs and other expenses. These were, however, partially offset by a fall in net occupancy, equipment, supplies and communication, data processing and software and marketing.
Commerce Bancshares’ efficiency ratio deteriorated to 60.30% from 59.73% in the prior-year quarter. An increase in efficiency ratio implies a fall in profitability.
Commerce Bancshares’ total loans improved 10.8% year over year to $11.5 billion as of Jun 30, 2014. Additionally, total deposits rose 6.0% year over year to $19.0 billion.
In the reported quarter, credit quality reflected a mixed bag. Total non-performing assets came in at $51.7 million, down 1.6% year over year. Further, allowance for loan losses as a percentage of total loans was 1.41%, down 19 basis points (bps) from the prior-year quarter.
Again, net loan charge-offs decreased 19.4% year over year to $7.6 million. During the reported quarter, provision for loan losses, increasing 2.4% year over year, matched net loan charge-offs.
Capital and Profitability Ratios
During the quarter, Commerce Bancshares’ capital and profitability ratios too were a mixed bag. As of Jun 30, 2014, Tier I leverage ratio came in at 9.12%, up from 9.08% in the prior-year quarter. Tangible common equity to assets ratio as of Jun 30, 2014 was 8.60%, decreasing from 9.06% as of Jun 30, 2013.
The company’s return on average assets was 1.18%, down from 1.20% as of Jun 30, 2013. Return on average equity decreased to 11.79% from 12.07% as of Jun 30, 2013.
However, book value, based on total equity was $24.69 per share as of Jun 30, 2014, up from $22.13 as of Jun 30, 2013.
Despite mounting non-interest expenses, increase in loans and deposits remain a positive for the company going forward. However, a low interest rate environment, sluggish economic recovery and stringent regulations will continue to weigh on its top line in the quarters ahead.
Nevertheless, given its stable capital base and solid liquidity, we remain optimistic about Commerce Bancshares’ inorganic growth plans and efficient capital deployment activities.
Among other Midwest banks, PrivateBancorp, Inc. (PVTB), Huntington Bancshares Inc. (HBAN), and Old National Bancorp. (ONB) are slated to report results on Jul 17, Jul 18 and Aug 4, respectively.