Commerce Bancshares' Numbers Do the Talking

KANSAS CITY, Mo. ( TheStreet) -- Commerce Bancshares ( CBSH) sets the standard for tradition among Midwest banks.

The 145-year-old institution has been a steady earnings performer, increasing its net-interest income and fee revenue through the credit crisis without government assistance.

Commerce Bancshares had $18.4 billion in total assets as of June 30. The company operates through over 370 offices in Missouri, Illinois, Kansas, Oklahoma and Colorado.

>>Is Commerce Bancshares a Buy?

The Kansas City lender has been remarkably stable through the credit crisis. According to data provided by SNL Financial, the company's 10.67% return on average equity for the first half of 2010 puts it in eighth place among U.S. bank and thrift holding companies with total assets exceeding $10 billion dollars. Looking back at the top ten earners among this group of holding companies, only Commerce, Northern Trust ( NTRS) and Bank of Hawaii ( BOH) were among the top ten for return on equity for 2008, 2009 and the first half of 2010.

The family of CEO David Kemper has been involved with Commerce for most of the its history. Although the company is responsive to requests for information from analysts and the media, Commerce doesn't hold quarterly conference calls with analysts, preferring to let the company's steady earnings performance speak for itself.

For the second quarter, Commerce reported net income of $59.7 million, or 71 cents a share, up from $44.2 million, or 53 a share, during the first quarter and $37 million, or 48 cents, a year earlier. Most of the improvement in earnings came from a reduction in the quarterly provision for loan losses as credit quality improved.

The company said that new regulations requiring customers to opt-in for overdraft protection on ATM or debit card overdrafts could reduce second-half 2010 overdraft fees by as much as $13 million. Total deposit account charges and other fees for the first half of 2010 were $49.5 million.

Solid growth in the company's corporate credit card business is expected to partially offset the decline in ATM/Debit card overdraft fees. Commerce has been providing incentives to commercial customers (with a focus on schools and hospitals), to pay suppliers and vendors using their corporate cards, rather than by check. The company's card transaction fee revenue for the second quarter was $37.7 million, which was a 25% increase year-over-year.

Chief Accounting Officer Jeffery Aberdeen said that "on the consumer side, we are known as a credit card bank," adding that "for our size, we are fairly unusual for having so much card activity."

As of June 30, Commerce's credit card loan portfolio totaled $776 million which Aberdeen said was among the largest 15 card portfolios among U.S. banks. Out of the holding company's total second-quarter revenue of $287.6 million, $37.7 million or 13% was card revenue, and the company prides itself on having a more diverse revenue stream than its peers.

Despite a 9% year-over-year decrease in the company's portfolio of loans held for investment , Commerce's net interest income for the second quarter increased to $163.7 million for the second quarter from $157.4 million a year earlier, as the company followed the industry trend of increasing its core deposits. Those came mainly in the form of checking, money market and savings accounts - while reducing its CD funding by 25% and reducing its reliance on wholesale funding by 6%.

While Commerce's credit card business is a national business, the company has taken a "nothing fancy" approach of sticking with making residential, business and commercial real estate loans in its home market branching out from its historical base in Kansas City and St. Louis to cover the South Midwest.

Strong credit quality is the biggest factor in the company's ability to continue making money and build equity through the credit crisis. Nonperforming assets -- including nonaccrual loans and loans past due 90 days or more (excluding government-guaranteed balances) and repossessed real estate - comprised a low 0.76% of total assets as of June 30, and the company's annualized ratio of net charge-offs to average loans for the second quarter was 0.91%. While aggregate numbers weren't yet available for the second quarter, Commerce's credit quality numbers compared very well with the aggregate "noncurrent assets" ratio of 3.43% and net charge-off ratio of 2.83% reported by the Federal Deposit Insurance Corporation for all U.S. banks and thrifts.

Commerce Bancshares was strongly capitalized as of June 30, with a Tier 1 leverage ratio of 10.01% and a total risk-based capital ratio of 15.49%. These ratios need to be at least 5% and 10% for most banks to be considered well capitalized, although hundreds are currently required by regulators to hold more.

Commerce's tangible common equity ratio as of June 30 was 10.15%. As discussed in TheStreet's Bank Stocks: Taking Off the Rose-Colored Glasses, this conservative measure of common equity has become a favorite for analysts and investors during the banking crisis. Among U.S. bank and thrift holding companies with total assets exceeding $10 billion, only four including People's United Financial ( PBCT), CapitalSource ( CSE), TFS Financial ( TFSL) and IBERIABANK Corp. ( IBKC) had higher tangible common equity ratios, according to second-quarter data provided by SNL Financial.

Although in hindsight it appears Commerce Bancshares didn't need the additional capital, the company did raise $100 million in common equity through a public offering that ended on July 31, 2009.

Commerce Bancshares pays a quarterly dividend of 23.5 cents a share, 2.57%, based on Friday's closing price of $36.56. Shares were down 4.41% year-to-date. When asked if the company was considering an increase in the dividend, Aberdeen said Commerce's management had "always been comfortable with very strong capital," but was considering "all ways of managing capital," including share buybacks, expansion and an increased dividend payout.

Howe Barnes Hoefer & Arnett analyst John Rodis downgraded the shares to neutral on August 3, since the share price had increased 11% over the previous two months to $39.71 and shares were "more in line with its peer group." In an interview with TheStreet, Rodis was very positive when discussing the company's prospects, emphasizing Commerce's low ratio of loans to deposits and excellent earnings track record. He said "the biggest knock is earnings don't grow as fast" as some banks because of the company's conservative nature, "but there's got to be a tradeoff."

-- 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.

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