Commerce Bancshares (CBSH) Stock Up 3.5% On Q2 Earnings Beat

Shares of Commerce Bancshares, Inc. (NASDAQ:CBSH) jumped more than 3.5% following the release of its second-quarter 2017 results. Earnings of 75 cents per share easily surpassed the Zacks Consensus Estimate of 70 cents. The figure reflects a 13.6% rise from the year-ago quarter.

Better-than-expected results were mainly driven by higher net interest income and non-interest income. Also, the company witnessed a modest loan growth and its capital and profitability ratios improved. However, a rise in expenses and provision for loan losses were the undermining factors.

Net income available to the common shareholders in the reported quarter was $76.7 million, up 13.4% year over year.

Rise in Costs Offset by Higher Revenues

Total revenue for the quarter was $305.9 million, an increase of 6.1% year over year. Also, the figure beat the Zacks Consensus Estimate of $303.6 million.

Net interest income increased 6.4% from the prior-year quarter to $182.8 million. Further, net interest margin was 3.19%, up 8 basis points (bps) year over year. The rise reflected an increase in interest earned on loan portfolio and stable funding cost.

Non-interest income was $123.1 million, up 5.6% year over year. The rise was mainly driven by higher loan fees and sales, trust fees, and deposit account charges and other fees.

Non-interest expenses rose 4.2% year over year to $184.6 million. The increase was largely due to a rise in salaries and employee benefit costs, deposit insurance, and data processing and software costs.

Efficiency ratio for the quarter declined to 60.24% from 61.27% in the prior-year quarter. A fall in efficiency ratio indicates improved profitability.

Strong Balance Sheet

As of Jun 30, 2017, total loans were $13.6 billion, up marginally on a sequential basis. However, total deposits, as of the same date, were $20.8 billion, down 1.3% from the prior month.

However, total stockholder’s equity was $2.62 billion as of Jun 30, 2017, a decline of 1.4% from the previous month.

Credit Quality Worsens

Provision for loan losses increased 16.7% year over year to $10.8 million. Net loan charge-offs to average loans ratio (excluding loans held for sale) increased 8 bps year over year at 0.32%.

However, allowance for loan losses, as a percent of total loans, came in at 1.16%, down 2 bps year over year.

Improving Profitability & Capital Ratios

As of Jun 30, 2017, Tier I leverage ratio was 9.87%, up from 9.36% from the prior-year quarter. Moreover, tangible common equity to tangible assets ratio grew from 9.09% as of Jun 30, 2016 to 9.37%.

Further, the company’s return on average assets was 1.26%, up from 1.15% in the year-ago quarter. Return on average common equity was 12.47% as of Jun 30, 2017, increasing from 11.69% in the last-year quarter.

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Our Take

Commerce Bancshares’ efforts to expand its footprint in newer markets, expectation of lesser regulations and an improving rate scenario should continue improving revenues. Persistent fee income growth and strong loan and deposit balances remain impressive. However, mounting expenses continue to be a major concern for the company. Also, significant exposure to real estate loans might pose some risks for it in the near term.