High Rates & Loan Demand Aid CBSH Despite Weak Asset Quality

Core Viewpoint - Commerce Bancshares, Inc. (CBSH) is positioned for growth due to strong loan demand, high rates, and a solid balance sheet, but faces challenges from weakening asset quality and rising expenses [1] Growth Factors - CBSH's organic growth has led to a revenue CAGR of 3.5% from 2018 to 2023, driven by a 4% CAGR in loan balances and strong fee income [2] - Projected revenue and net loans and leases CAGRs are 2.3% and 2.8% respectively by 2026 [2] Net Interest Income (NII) Support - Despite Federal Reserve interest rate cuts, high rates are expected to support CBSH's NII, although rising funding costs may exert pressure [3] - A balance sheet repositioning strategy announced in May 2024 aims to enhance NII by selling debt securities and reinvesting at higher yields [3] Yield on Interest-Earning Assets - CBSH's net yield on interest-earning assets increased from 2.85% in 2022 to 3.16% in 2023, with expectations of further increases to 3.44% in 2024, 3.47% in 2025, and 3.55% in 2026 [4] Balance Sheet and Capital Distributions - As of September 30, 2024, CBSH had total debt of $620 million and cash and deposits totaling $3.1 billion [5] - CBSH has maintained a 5% stock dividend for over 25 years and has a share repurchase program, with approximately 3.6 million shares available under authorization as of September 30, 2024 [6] Near-Term Challenges - CBSH is facing deteriorating asset quality, with a significant rise in provisions for credit losses in 2022 and 2023, expected to remain high in the near term [7] - Non-interest expenses have increased at a CAGR of 4.8% over the last five years, driven by higher salaries and benefits, with expectations of further increases of 3.5% and 4.8% in 2024 and 2025 respectively [8] Price Performance - CBSH shares have increased by 27.3% this year, underperforming the industry growth of 33.4% [9] Peer Comparison - Competitors such as Civista Bancshares (CIVB) and MidWestOne Financial Group (MOFG) have better rankings, with CIVB's shares gaining 41.5% and MOFG's shares increasing by 20% in the past three months [11][12]