Compressed Margins Continue to Pressure Commerce Bancshares’ First-Quarter Earnings


Commerce Bancshares reported net income to common shareholders of $61.0 million or $0.67 per diluted share, compared with $65.8 million or $0.70 per diluted share a year ago. The quarter was highlighted by solid deposit growth that funded consumer and commercial loan growth. However, the positive impact of the balance sheet growth was outweighed by the effect the low interest rate environment has had on asset yields. Asset quality continued to improve, allowing CBSH to keep its loan loss provision low. At this time, we are leaving our moat rating and fair value estimate unchanged.

Commerce’s net interest margin declined to 3.07% compared with 3.35% last quarter as low rates had an impact on both loans and investments. In addition, Commerce saw a $4.8 million decline in its inflationprotected government securities. As with most regional banks, we anticipate that net interest margins will remain under pressure for the remainder of 2013. With this margin pressure, Commerce will have to rely on strong asset growth to attempt to increase net interest income. Overall, Commerce earned a return on equity of 11.4% for first quarter 2013 compared with 12.0% year-ago. While Commerce is still earning returns in excess of its cost of capital, net interest margin pressure with this flat rate environment continues to make this performance a challenge.

Asset quality improvement continued with non-accrual loan loans declining by 12% compared with last quarter and 35% compared with last year. Total nonperforming assets represented a paltry 0.33% of total assets compared with 0.82% for first quarter 2012. The allowance for loan losses remains a healthy 1.68% of total loans compared with 1.96% of loans for first quarter 2012. As we expected, loan loss provisions have declined and now represent only 0.13% of total loans. As long as asset quality either remains at these pristine levels or improves, we expect the low loan loss provisions will continue to be low as the allowance approaches 1.5% of total loans. Overall, we think Commerce had a decent quarter. With its low loan/deposit ratio, generating higher yielding assets (specifically loans) will be crucial to the bank maintaining double-digit returns in the near term.

Expenses decreased to $155.0 million for first quarter 2013 compared with $158.3 million in fourth quarter 2012. The expense decrease was almost exclusively in salaries and benefits. Commerce continues to closely monitor its expenses in this revenue-constrained environment, as a result of low rates. We will continue to monitor company expenses going forward for any permanent changes.


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