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Tickers in this Article: CBSH, TCB
Commerce Bancshares Inc.'s (CBSH) third quarter 2012 earnings of 75 cents per share lagged the Zacks Consensus Estimate by 2 cents. This compares unfavorably with the prior quarter's earnings of 80 cents per share, but favorably with the year-ago quarter's earnings of 72 cents. The sequential improvement was due to higher non-interest income and a decrease in operating expenses, partially offset by a lower net interest income. Moreover, credit quality and capital ratios continued to show improvements.

Net income for the reported quarter was $66.0 million, down 6.7% sequentially; however, it inched up 1.0% on a year-over-year basis.

Performance Details

Commerce Bancshares' total revenues were $264.1 million, down 4.1% from $275.4 million in the prior quarter and 3.1% from $272.5 million in the year-ago quarter. Total revenues were also ahead of the Zacks Consensus Estimate of $265.0 million by 0.3%.

Taxable equivalent net interest income was $159.9 million, declining 6.6% sequentially. The fall was largely attributable to lower inflation interest on the company's inflation-protected securities.

Non-interest income inched up 0.1% from the previous quarter to $100.9 million. The sequential improvement was mainly due to higher bank card transaction fees and capital market fees, partly offset by lower trust fees, deposit account charges and other fees, consumer brokerage services as well as other income.

Non-interest expense fell 1.9% from the prior quarter to $153.4 million. The decrease was mainly attributable to lower other expenditure, deposit insurance expenses, marketing costs as well as supplies and communication expenses, partly mitigated by higher salaries and employee benefits, net occupancy costs, as well as data processing and software expenditure.

Efficiency ratio, in the quarter under review, increased to 59.99% from 58.53% in the prior quarter. The hike in efficiency ratio implies deterioration in profitability.

Credit Quality

During the quarter, Commerce Bancshares' credit quality continued to witness considerable improvement. Total nonperforming assets declined to $73.4 million from $82.3 million at the end of the prior-quarter and $99.7 million at the end of the prior-year quarter. Further, allowance for loan losses as a percentage of total loans was 1.82% down from 1.90% in the prior quarter and 2.07% in the previous-year quarter.

However, net charge-offs escalated 10.6% sequentially but deteriorated 39.0% year over year to $9.1 million. Likewise, provision for loan losses stood at $5.6 million in the quarter, up 7.0% from the previous quarter but down 51.0% from the year-ago quarter.

Balance Sheet

Average loans (excluding loans held for sale) inched up 2.3% from the previous quarter and 3.9% from the comparable quarter last year to $9.4 billion. Further, total deposits remained almost flat sequentially but improved 5.2% year over year to $16.8 billion, reflecting growth in non-interest bearing deposits and savings, interest checking and money market deposits.

Capital and Profitability Ratios

Commerce Bancshares' capital ratios improved in the quarter under review. Tier I leverage ratio came in at 10.00%, up from 9.73% in the prior quarter and 9.74% in the prior-year quarter. Tangible common equity to assets ratio as of September 30, 2012 was 10.47%, up from 10.16% as of June 30, 2012 and 9.72% as of September 30, 2011.

As of September 30, 2012, the company's return on average assets was 1.28% compared with 1.38% as of June 30, 2012 and 1.32% as of September 30, 2011. Additionally, the company's return on average equity decreased to 11.57% from 12.80% as of June 30, 2012 and 12.15% as of September 30, 2011.

However, book value based on total equity as of September 30, 2012 was $26.33 per share, up from $25.47 as of June 30, 2012 and $23.95 as of September 30, 2011.

Share Repurchase

During the quarter, Commerce Bancshares repurchased 98,000 shares at an average price of $39.66 per share.

Our Viewpoint

Strong capital base and an excellent liquidity enable Commerce Bancshares to position itself comfortably for expansion via acquisitions. Moreover, the company's direct retail and commercial banking franchise are expected to perform steadily. Its focus on developing in the high-growth areas and efforts to reorganize expenses would also prove accretive to overall growth in the future.

However, prevailing low interest rates, diminishing loan demands and muted economic growth are expected to hurt Commerce Bancshares' overall performance. Also, the recently proposed financial rules and the stringent regulatory reforms are matters of concern.

One of Commerce Bancshares peers, TCF Financial Corporation (TCB) is scheduled to announce its third quarter 2012 results on October 19.

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

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