Commerce Bancshares, Inc. CBSH has been well-placed for growth on the back of decent loan demand, relatively high rates and a solid balance sheet. However, weakening asset quality and a steady rise in expenses are headwinds.

Key Factors Fueling Growth of Commerce Bancshares

Organic Growth Story: CBSH’s organic expansion efforts have been driving its growth. Revenues witnessed a five-year (2018-2023) compound annual growth rate (CAGR) of 3.5%, which was largely driven by strong loan balances (which experienced a 4% CAGR over the four years ended 2023) and fee income sources. Decent loan demand and solid non-interest income performance are likely to drive top-line expansion. We project total revenues and net loans and leases to reflect a CAGR of 2.3% and 2.8% by 2026, respectively.

Efforts to Support Net Interest Income (NII) Growth: Despite the Federal Reserve cutting interest rates, relatively high rates will likely support Commerce Bancshares’ NII in the quarters ahead. However, rising funding costs will exert some pressure on it. In May 2024, the company announced a balance sheet repositioning strategy, which will boost its NII. Under this, the company sold its debt securities and reinvested the proceeds at higher yields.

Further, driven by these efforts, CBSH’s net yield on interest-earning assets is likely to expand. In 2023, the net yield on interest-earning assets expanded to 3.16% from 2.85% in 2022. We expect the metric to be 3.44% in 2024, 3.47% in 2025 and 3.55% in 2026.

Solid Balance Sheet & Impressive Capital Distributions: As of Sept. 30, 2024, Commerce Bancshares had a total debt (comprising other liabilities and other borrowings) of $620 million and cash and due from banks and interest-earning deposits with banks of $3.1 billion.

Driven by a strong liquidity and balance sheet position, CBSH has been consistently paying a 5% stock dividend for more than 25 years now (most recently announced in October 2024). Apart from this, it pays regular quarterly cash dividends and has a share repurchase program in place. As of Sept. 30, 2024, approximately 3.6 million shares remained available under the authorization.

Near-Term Headwinds for CBSH

Worsening Asset Quality: CBSH’s deteriorating asset quality is a major concern. While the company recorded a provision benefit in 2021, a significant rise in provision for credit losses was witnessed in 2022 and 2023. Overall provisions are likely to remain high in the near term as the company continues to build reserves to tackle the tough operating backdrop. We expect the metric to remain elevated in future quarters.

Rising Expense Base: Commerce Bancshares’ persistent increase in non-interest expenses is a concern. The metric witnessed a 4.8% CAGR over the last five years ended 2023 , primarily due to higher salaries and employee benefit costs. Overall expenses are likely to remain elevated in light of ongoing technological upgrades and inflationary pressures. We expect non-interest expenses to rise 3.5% and 4.8% in 2024 and 2025, respectively.

CBSH’s Price Performance & Zacks Rank

So far this year, shares of Commerce Bancshares have jumped 27.3%, underperforming the industry’s growth of 33.4%.

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CBSH currently carries a Zacks Rank #3 (Hold).

CBSH’s Peers Worth a Look

Some better-ranked peers of CBSH are Civista Bancshares CIVB and MidWestOne Financial Group MOFG, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Estimates for CIVB’s current-year earnings have been revised 3.8% upward in the past week. The company’s shares have gained 41.5% in the past three months.

Estimates for MOFG’s current-year earnings have been revised 1.3% north in the past seven days. The company’s shares have jumped 20% in the past three months.

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