Commerce Bancshares (CBSH) Q3 Earnings Miss, Stock Down 2.4%

Shares of Commerce Bancshares, Inc. (NASDAQ:CBSH) slipped more than 2.4% following the release of its third-quarter 2017 results. Earnings of 71 cents per share missed the Zacks Consensus Estimate of 75 cents. The figure reflects a 9.2% rise from the year-ago quarter.

The results were mainly driven by higher net interest income and non-interest income. Also, the company witnessed modest loan growth, and its capital and profitability ratios improved. However, escalated expenses and an increase in provision for loan losses acted as headwinds.

Net income available to common shareholders was $74.6 million, up 8.9% year over year.

Revenue Growth Offsets Rise in Costs

Total revenue for the quarter was $304.8 million, reflecting an increase of 4.9% year over year. However, the figure missed the Zacks Consensus Estimate of $312.4 million.

Net interest income increased 6.7% from the prior-year quarter to $182.6 million. Further, net interest margin was 3.18%, up 10 basis points (bps) year over year. The rise reflects an increase in interest earned on loan portfolio and stable deposit cost.

Non-interest income was $122.2 million, up 2.4% year over year. The rise was mainly driven by all components except bank card transaction fees and capital market fees.

Non-interest expenses rose 1.8% year over year to $184.6 million. The increase was largely due to a rise in salaries and employee benefit, marketing and other costs.

Efficiency ratio for the quarter declined to 60.44% from 62.25% in the prior-year quarter. A fall in efficiency ratio indicates improved profitability.

Strong Balance Sheet

As of Sep 30, 2017, total loans were $13.8 billion, up 1.5% on a sequential basis. However, total deposits, as of the same date, were $20.4 billion, down 1.9% from the prior quarter.

However, total stockholders’ equity was $2.7 billion as of Sep 30, 2017, reflecting a rise of 3.1% from the previous quarter.

Credit Quality: A Mixed Bag

Provision for loan losses increased 47.4% year over year to $10.7 million. Net loan charge-offs to average loans ratio (excluding loans held for sale) increased 11 bps year over year to 0.31%.

However, allowance for loan losses, as a percent of total loans, came in at 1.15%, down 2 bps year over year.

Improving Profitability & Capital Ratios

As of Sep 30, 2017, Tier I leverage ratio was 10.16%, up from 9.58% from the prior-year quarter. Moreover, tangible common equity to tangible assets ratio grew from 9.22% as of Sep 30, 2016 to 9.72%.

Further, the company’s return on average assets was 1.19%, up from 1.12% in the year-ago quarter. Return on average common equity was 11.35% as of Sep 30, 2017, up from 10.97% in the year-ago quarter.

Our Take

Commerce Bancshares’ efforts to expand its footprint in newer markets and an improving rate scenario should continue improving revenues. Persistent growth in fee income and loan balances remain impressive. Further, improving profitability and capital ratios are encouraging.

However, mounting expenses continue to be a major concern for the company. Also, significant exposure to real estate loans might pose near-term risks.

Commerce Bancshares, Inc. Price, Consensus and EPS Surprise

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, results are expected from First Financial Bancorp (NASDAQ:FFBC) on Oct 19. First Midwest Bancorp, Inc. (NASDAQ:FMBI) and Old National Bancorp (NASDAQ:ONB) are scheduled to announce their results on Oct 24.

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