Commerce Bancshares (CBSH) Q1 Earnings Beat, Costs Rise

Commerce Bancshares, Inc. (NASDAQ:CBSH) reported first-quarter 2017 earnings of 68 cents per share, surpassing the Zacks Consensus Estimate of 65 cents. Moreover, the figure reflects a 9.7% rise from the year-ago quarter.

Better-than-expected results were primarily driven by an increase in total revenue based on higher net interest income. The company witnessed growth in loans but deposits were relatively low. Rising expenses and an increase in provisions were the undermining factors. Shares of Commerce Bancshares lost 2.4% following its earnings release.

Net income available to the common shareholders in the reported quarter was $69.3 million, up 9.7% year over year.

Revenues Improve but Costs Escalate

Total revenue for the quarter was $295.3 million, an increase of 4.4% year over year. However, the figure marginally lagged the Zacks Consensus Estimate of $296 million.

Quarterly net interest income increased 8.9% year over year to $178.3 million.

Non-interest income was $117.1 million, down 1.6% year over year. The decrease was mainly due to lower profits on branch property sales along with lower bank card and swap fee income.

Non-interest expenses rose 5.3% year over year to $186.8 million triggered by a rise in salaries and employee benefits costs, bank card expense and professional fees. However, the rise was partly offset by lower supplies, communication and marketing costs. Non-interest expenses included a contribution expense of $2.3 million related to the donation of appreciated securities.

Efficiency ratio for the quarter increased to 63.14% from 62.62% in the prior-year quarter. A rise in efficiency ratio indicates lower profitability.

Strong Balance Sheet

As of Mar 31, 2017, total loans were $13.57 billion, up 1.2% sequentially. Total deposits, as of the same date, were $21.09 billion, down marginally from the prior month.

However, total stockholder’s equity was $2.56 billion as of Mar 31, 2017, an increase of 2.5% from the previous month.

Credit Quality: A Mixed Bag

Allowance for loan losses, as a percent of total loans, came in at 1.16%, down 4 basis points (bps) year over year. Net loan charge-offs to average loans ratio (annualized) remained stable year over year at 0.28%.

However, provision for loan losses increased 17.9% year over year to $11.1 million.

Improving Profitability & Strong Capital Position

As of Mar 31, 2017, Tier I leverage ratio was 9.56%, up 45 bps year over year. Moreover, tangible common equity to tangible assets ratio grew 19 bps year over year to 9.03%.

Further, the company’s return on average assets improved 8 bps year over year to 1.15%, and return on average common equity increased 54 bps year over year to 11.74%.

Our Take

Commerce Bancshares is well positioned to capitalize on inorganic growth opportunities, given a strong capital base and healthy liquidity level. Also, the company’s persistent fee income growth and strong loan and deposit balances remain impressive.

However, its significant exposure to residential mortgage and commercial real estate loans can pose a threat in the near term. Also, elevated expenses remain a concern.

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, First Financial Bancorp. (NASDAQ:FFBC) is scheduled to announce results on Apr 20. Both First Midwest Bancorp, Inc. (NASDAQ:FMBI) and Old National Bancorp (NASDAQ:ONB) will report on Apr 25.

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