High Rates & Loan Demand Aid Commerce Bancshares, Costs Ail

Core Viewpoint - Commerce Bancshares, Inc. (CBSH) is positioned for top-line growth due to strong loan demand and high interest rates, although concerns about weak asset quality and elevated expenses persist [1] Group 1: Growth Drivers - Solid loan balances have recorded a compound annual growth rate (CAGR) of 3.2% from 2019 to 2024, contributing to revenue growth despite a decline in 2020, with a five-year CAGR of 4.2% [2] - Total revenues are expected to grow at a CAGR of 2.7% by 2027, with capital market fees projected to grow at 5.1% and loan fees and sales at 5% [3] Group 2: Interest Rates and Balance Sheet Strategy - The Federal Reserve's steady interest rates will support CBSH's net yield on interest-earning assets, which expanded to 3.47% in 2024 from 3.16% in 2023 and is expected to reach 3.75% by 2027 [4][5] - CBSH's balance sheet repositioning strategy, initiated in May 2024, involves selling debt securities and reinvesting proceeds at higher yields, which is anticipated to boost growth [4] Group 3: Capital and Liquidity Position - As of March 31, 2025, CBSH had total debt of $624.7 million and cash and due from banks totaling $3.3 billion, indicating strong earnings capacity to meet debt obligations [6] - CBSH has a history of consistent capital distribution, including a 5% stock dividend for over 25 years and a share repurchase program, enhancing shareholder value [7] Group 4: Near-Term Challenges - Asset quality has been deteriorating, with a significant rise in provisions for credit losses recorded in 2022 and 2023, and total net loan charge-offs (NCOs) showing a CAGR of 2.8% over four years ending in 2024 [8][9] - Non-interest expenses have increased at a CAGR of 4.4% over the last five years, primarily due to higher salaries and benefits, and are expected to continue rising amid technology investments and inflationary pressures [11]