This morning, Commerce Bancshares (CBSH) reported 4Q08 earnings of $0.58 per share, four cents short of consensus estimates. The miss was primarily due to sharp increase in credit costs and lower non-interest income, partially offset by better-than-expected growth in net interest income, due to lower funding costs.

Net interest income in 4Q08 amounted to $156.3 million, up 3.1%, from the previous quarter and 13.7%, from the prior-year quarter. The increase over the previous quarter was mainly due to lower rates paid on deposits and other borrowings, as well as higher average investment securities balances and higher rates earned on these securities.

Non-interest income came in at $85.2 million, down 10.8% from the previous quarter and down 13.1%, compared to prior-year quarter. The year-over-year decline was mainly due to lower deposit and trust fee income.

Credit metrics, while still better much most of its peers, deteriorated further during the quarter, with the non-performing assets rising 28 bps sequentially to 0.70% of total loans. Net loan charge-offs for the quarter amounted to $24.7 million, compared with $18.7 million in the prior quarter and $14.1 million in the prior-year quarter. The increase in net charge-offs was mainly the result of higher consumer, credit card, personal real estate and construction loan losses.

After reviewing the results and based on credit concerns, we are moderating our FY09 estimate to $2.50 per share and installing our FY10 estimate at $2.65 per share. CBSH currently trades at 14.9 times the consensus forward estimate (versus 15.4 times at the time of our last full report), a 35% premium to the peer group median (versus a 37% premium at that time).? We feel that the premium is justified to some extent, given CBSH's superior capital ratios, credit quality and net interest margin, its diversified revenue stream as well as lower exposure to the real estate loans, compared to its peers.

We are maintaining our Hold recommendation on the shares.