This morning, Commerce Bancshares, Inc. (CBSH) reported its 1Q09 financial results. The company reported earnings of $30.8 million or $0.40 per diluted share, compared to $43.8 million or $0.57 per diluted share in the prior quarter. The results were seven cents short of our estimate and nine cents short of consensus, mainly due to a sharp increase in the loan loss provision.

Taxable-equivalent net interest income for 1Q09 decreased 4.4% sequentially. Average loans increased 1.5% sequentially and 2.6% year-over-year to $11.1 billion, primarily the result of the acquisition of $368 million in federally guaranteed student loans in 4Q08. Average deposits increased 6.5% sequentially and 9.3% year-over-year.

Credit metrics deteriorated further during the quarter, with total non-performing assets rising to $118.7 million or 1.08% of loans outstanding, while net charge-offs increased to $34.9 million. The increase in net charge-offs was mainly the result of higher consumer, credit card and construction loan losses.

Annualized net loan charge-offs increased 38 bps sequentially to 1.28% of average loans. The allowance for loan losses at March 31, 2009 amounted to $180.9 million or 1.65% of total loans, up 12 bps sequentially and 35 bps year-over-year. The provision for loan losses for the quarter increased 4.4% sequentially and 115.8% year-over-year to $43.2 million.

ROA and ROE deteriorated to 0.73% and 7.82%, respectively, from 1.04% and 10.8% for the previous quarter.

While CBSH is in a somewhat better position than many of its peers due to its superior capital ratios, better credit quality, and net interest margin, its diversified revenue stream as well as lower exposure to the real estate loans, compared to its peers, its results will continue to suffer from the higher loan losses in the coming quarters. We are maintaining our Hold recommendation on the shares.

Read the full analyst report on “CBSH”
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