CBSH - Commerce Bancshares: Not Bad But Not Great Either

2023-07-25 10:29:48 ET

Summary

• Commerce Bancshares, a bank with a market capitalization of $6.1 billion, is trading near its low point following the banking industry crisis earlier this year.
• The bank has seen some stability recently, with net interest income growing from $692.7 million in 2020 to $914.1 million in 2022, and a rebound in deposits in the week ending April 10th.
• Despite these positive signs, the bank is not considered a prime prospect for investors due to issues with outgoing deposits and a price to earnings multiple of about 12.5.

Earlier this year, the banking industry went through what could only be described as a crisis. A number of financial institutions ended up failing, driven by concerns that large amounts of uninsured deposits and exposure to high-risk clients could result in solvency concerns. When it comes to the banks that survived the downturn, we have seen a rather meaningful recovery for the most part. But not every company his bounce back in the months since then. One example of a business that is trading very near to the low point that it was at following the collapse of the sector is Commerce Bancshares ( CBSH ), a rather sizable bank with a market capitalization of $6.1 billion. There are certain aspects of the company that investors should look upon in a favorable light. But we need to look at the picture as a whole, I do believe that it is not an ideal prospect for investors to consider.

A mediocre prospect

According to the management team at Commerce Bancshares, the enterprise operates as a bank holding company that engages in a wide variety of various activities. Examples include general banking activities like accepting deposits and giving out loans. It provides mortgage banking, consumer loans, and more. It even offers clients a range of investment and asset management products, whether those clients are individuals or businesses. Unlike many community banks, the firm also owns various non-banking subsidiaries that engage in activities like private equity investment, securities brokerage services, insurance sales, specialty lending, leasing activities, etc.

Over the past few years , the value of the loans on the company's books has remained fairly consistent. The range has been between $15.18 billion and $16.54 billion. That latter number covers the first quarter of the company's 2023 fiscal year. Of this amount, about $10.5 billion, or 63.5%, of its loans fall under the commercial side. The largest chunk here would be the $5.7 billion worth of business loans, followed up by business real estate loans at $3.4 billion. I do understand that many investors are concerned right now about exposure to the office space category of real estate. About 14.4% of the company’s real estate business loan portfolio of $3.5 billion, falls under the office niche. That translates to about 3% of total loans on the company's books, or just over $500 million in all. The rest of the company's loan portfolio is dedicated to the consumer side. The largest chunk of exposure on this front would be the $2.9 billion that's dedicated to personal real estate.

Most of the banks that I have analyzed have the vast majority of the deposits that they have collected invested in loans. But Commerce Bancshares is a little different in this regard. In addition to the $16.54 billion of loans on its books, the company also has $11.55 billion worth of investment securities that are classified as available for sale. The largest chunk of these securities would be the $8.24 billion of mortgage and other asset backed securities, $4.27 billion worth of which is in the form of agency mortgage-backed securities.

Although the loan picture for the company and the investment securities picture for the company are both important, what's even more important would be the deposits. After all, it's the deposit side of the banking sector that sent the industry reeling earlier this year. After seeing deposits jump from $26.95 billion in 2020 to $29.81 billion in 2021, the company saw a decline to $26.19 billion in 2022. This decline worsened, going down to $24.68 billion during the first quarter of 2023. There likely are two reasons behind the declines that we are seeing here. For starters, higher interest rates do often translate to deposits coming off the books because depositors start looking for better returns elsewhere. But then you also have the other side which would involve deposits that came out of the company because of concerns over its stability. It's safe to say that between 2021 and 2022, essentially all of the decline in deposits would have been attributable to the former. But during the first quarter of this year, it's impossible to tell how much can be chalked up to the former and how much to the latter. One good piece of news is that, after bottoming out Around early April, the company did see what it considers to be a rebound in deposits in the week ending April 10th.

When it comes to uninsured deposits, it is interesting that from the end of 2022 to the end of the first quarter of 2023, we saw a decline of roughly $1.5 billion from $11.3 billion to $9.8 billion. This means that we went from 43.2% of the company’s overall deposits being uninsured to a more modest but still lofty 39.7%. Management did disclose that if we remove from the picture the $2 billion of deposits that are backed by other assets, we would get this number down further to 31.6%. If it were not for this $2 billion being collateralized, the company wouldn't have enough borrowing capacity to cover all of its uninsured deposits. This is because overall borrowing capacity as of the end of the most recent quarter was $9.2 billion.

What this data suggests so far is that Commerce Bancshares has seen some stability as of late. This is positive but it remains to be seen what the ultimate impact will be on the company’s income statement. We do know that the firm has a solid track record when it comes to growth. Net interest income for the enterprise grew from $692.7 million in 2020 to $914.1 million in 2022. That growth continued into the 2023 fiscal year thanks in large part to a rise in the company's net interest margin. Net interest income of $240.2 million beat out the $218.6 million reported one year earlier. Non-interest income has been more or less range bound in recent years. Net income, meanwhile, has been a bit mixed. After peaking at $530.8 million in 2021, it dipped slightly to $488.4 million last year. So far this year, it is marginally higher than what it was in 2022.

Even if we use the data from 2022, however, shares of the company are not exactly great from a pricing perspective. We end up with a price to earnings multiple of about 12.5. In this space, the average multiple over time seems to be about 16. But I have seen other banks in recent months that are healthier than this that are trading at multiples of between 8 and 10. To make matters worse, the book value per share for the bank is only $21.51. That compares to the $49.54 that shares are trading at right now. Some of the other players I have looked at are trading at discounts to their book value.

Takeaway

From all that I can see, Commerce Bancshares looks okay, but it's far from being a prime prospect. The company has a problem with outgoing deposits and it's priced at levels that, while not bad, aren't exciting. These factors, combined with some of the other facts that I mentioned already throughout the article, make me believe that it is a better ‘hold’ candidate right now than a ‘buy’ candidate.

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