Commerce Meets Q3 Earnings Estimate

As expected, the Midwest lender's earnings were reduced by lower overdraft fees and weak loan demand.
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KANSAS CITY, Mo. (

TheStreet

) --

Commerce Bancshares

(CBSH) - Get Report

reported third-quarter net income of $55.9 million, or 67 cents a share, meeting the consensus earnings estimate among analysts polled by Thomson Reuters.

In comparison, the bank holding company earned $59.7 million, or 71 cents a share, the previous quarter and $51.6 million, or 63 cents a share, a year earlier.

The shares were down 1% to $37.29 in early trading. The company has been among the best performers among U.S. bank and thrift holding companies through the credit crisis and was featured in August as part of

TheStreet's

Best In Class

series.

CEO David Kemper attributed the decline in earnings from the second quarter on new regulations requiring that depositors to "opt-in" for expensive overdraft protection on ATM and debit card transaction, which resulted in lower fees on deposit accounts. These fees totaled $21.7 million in the third quarter, declining from $25.5 million the previous quarter and $27.8 million a year earlier.

The decline in noninterest income was partially offset by a decline in the provision for loan loss reserves, which was $21.8 million in the third quarter, compared to $22.2 million in the second quarter and $35.4 million in the third quarter of 2009. The company lowered the provision as loan quality continued to improve and its provision matched the $21.8 million in net charge-offs, which are loan losses less recoveries. Thus Commerce didn't "release" any loan losses reserves. This runs counter to the trend for many profitable large banks at this stage of the credit cycle. On Tuesday,

JP Morgan Chase

(JPM) - Get Report

reported a decline in loan loss reserves of $1.675 billion during the third quarter.

Commerce Bancshares had $18.4 billion in total assets as of September 30 and reported nonperforming assets - including nonaccrual loans, loans past due 90 days or more and repossessed real estate - were 0.77% of total assets, down from 0.79% the previous quarter and 0.97% a year earlier.

While industry aggregate figures won't be available for several weeks, the national aggregate "noncurrent assets" ratio for all U.S. banks and thrifts for the second quarter was 3.31% as of June 30, according to the

Federal Deposit Insurance Corporation

.

The annualized ratio of net charge-offs (loan losses less recoveries) to average loans for the third quarter was 0.89%. In comparison, the national aggregate net charge-off ratio for the second quarter was 2.64% according to the FDIC.

Commerce Bancshares reported a "net yield on earning assets" of 3.75% for the third quarter, declining from 3.97% the previous quarter and 4.02% a year earlier, as the company's margins continued to face pressure from low interest rates and weak loan demand. The securities investment portfolio increased to $7.1 billion as of September 30 from $6.3 billion the previous quarter, with the portfolio's average yield declining to 3.05% from 3.67%.

Despite the moderate decline in earnings, Commerce Bancshares achieve a return on average assets of 1.19% for the third quarter, which John Rodis of Howe Barnes Hoefer & Arnett said "most banks would die to have in two or three years." In a discussion with

TheStreet

, Rodis also emphasized that the company phased-in Regulation E (the opt-in requirement for ATM and debit card overdrafts) on July 1, when most banks didn't do so until the August 15 deadline, so a full quarter under the new rules was included in company's earnings. This was "typical Commerce," according to Rodis.

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--

Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.