Executive Summary / Key Takeaways

• Commerce Bancshares ($CBSH) is a long-standing regional bank leveraging a relationship-based model and Midwest presence amidst a competitive landscape dominated by larger, tech-focused national players.
• The company delivered strong financial results in Q1 2025, with net income increasing 16.8% year-over-year, driven by solid net interest income growth and robust non-interest income performance, particularly in trust and corporate cash management fees.
• Asset quality remains a key focus, with the allowance for credit losses increasing in Q1 2025 reflecting a more cautious macroeconomic forecast, although overall non-performing assets and potential problem loans saw mixed trends.
• CBSH maintains a robust liquidity position, supported by a stable core deposit base and significant borrowing capacity, while exceeding all regulatory capital requirements.
• Strategic initiatives, including a recent dividend increase marking 57 consecutive years of growth and the announced acquisition of FineMark Holdings, underscore a commitment to shareholder returns and targeted expansion.

A Legacy of Relationships in a Digital Arena

Founded in 1865, Commerce Bancshares has cultivated a deep-rooted presence in the Midwest, operating as a regional bank holding company primarily through its subsidiary, Commerce Bank. The company's business model is structured around three core segments: Consumer, Commercial, and Wealth, each contributing to a diversified revenue stream built on personalized service and local expertise. This relationship-based approach has been a cornerstone of CBSH's strategy for over a century, fostering customer loyalty and providing a stable foundation.

However, the banking industry landscape is continuously evolving, marked by increasing competition from national powerhouses like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as other regional players such as PNC Financial Services (PNC). These larger competitors often possess significant advantages in scale and technology investment, enabling greater operational efficiencies and broader market reach. While CBSH offers online and mobile banking services to meet modern customer expectations, Despite lacking proprietary, quantifiable technology differentiators, the competitive analysis indicates that some larger peers may hold an edge in digital processing speeds and technology adoption rates, reflecting higher R&D spending in this area. CBSH's strategic response balances the necessity of digital capabilities with its core strength in regional, relationship-driven banking and specialized services like patient health care financing, aiming to maintain its niche market share and customer retention in its core geographic footprint. The recently announced definitive merger agreement to acquire FineMark Holdings, Inc. in an all-stock transaction valued at approximately $585 million signals a strategic move to expand its reach and capabilities through targeted acquisition.

Financial Strength and Operational Performance

Commerce Bancshares demonstrated solid financial performance in the first quarter of 2025. Net income attributable to Commerce Bancshares, Inc. rose to $131.6 million, a notable 16.8% increase compared to $112.7 million in the same period of 2024. This growth was primarily fueled by an 8.1% increase in net interest income and a 6.8% rise in non-interest income, partially offset by a higher provision for credit losses and net losses on investment securities.

Net interest income reached $269.1 million in Q1 2025, up $20.1 million from Q1 2024. This improvement stemmed mainly from higher interest income on investment securities and securities purchased under agreements to resell, coupled with a decrease in interest expense on deposits and borrowings. Interest income on investment securities saw a significant boost, particularly from U.S. government and federal agency securities, benefiting from both higher average balances and increased rates earned, including contributions from inflation-protected securities tied to the CPI-U. Conversely, interest income on loans experienced a slight decrease year-over-year, driven by lower average rates earned despite overall loan portfolio growth.

Non-interest income climbed to $158.9 million in Q1 2025. Key drivers included a 10.7% increase in trust fees, largely due to growth in private client services, and a 10.2% rise in deposit account charges and other fees, primarily from corporate cash management services. Capital market fees also saw a substantial 31.3% increase, mainly from underwriting and trading securities activities. Bank card transaction fees, however, experienced a slight decline, primarily in net corporate card fees. Net losses on investment securities totaled $7.6 million in Q1 2025, mainly reflecting fair value adjustments on private equity investments, a different composition compared to the prior year's losses which were primarily from sales of available-for-sale securities.

Operating efficiency improved, with non-interest expense decreasing by 3.0% to $238.4 million compared to $245.7 million in Q1 2024. This reduction was largely attributable to the absence of a $10.0 million litigation settlement and a $4.0 million FDIC special assessment accrual adjustment that impacted the prior year. However, certain operating costs saw increases, including marketing, professional and other services, salaries and employee benefits, and data processing and software expenses. The slight rise in salaries and employee benefits was driven by higher incentive compensation and full-time salaries, partially offset by lower medical expenses.

Asset Quality and Risk Management

Maintaining sound asset quality is paramount for a financial institution. Commerce Bancshares' allowance for credit losses on loans stood at $167.0 million at March 31, 2025, representing 0.96% of total loans, an increase from 0.95% at December 31, 2024, and 0.93% at March 31, 2024. The provision for credit losses on loans in Q1 2025 was $15.1 million, an increase from $6.9 million in Q1 2024. This increase reflects a higher estimate for the allowance, driven by a macroeconomic forecast that indicated a slight decline in key variables and noted "Economic uncertainty surged in first quarter of 2025." While changes in forecast variables contributed to the increase, improvements in the volume of substandard commercial loans and those requiring additional qualitative factors partly offset this in the commercial portfolio. The personal banking portfolio allowance increased due to forecast changes, lower prepayment speeds in personal real estate, and increased loss experience in consumer loans.

Net loan charge-offs totaled $10.8 million in Q1 2025, up from $8.9 million in Q1 2024, primarily due to increases in consumer, consumer credit card, and business real estate loan net charge-offs. Non-accrual loans increased to $22.6 million at March 31, 2025, mainly in the business real estate and business loan categories, while potential problem loans (classified as substandard) decreased to $286.9 million. The company also manages risks associated with loan modifications for borrowers experiencing financial difficulty, which primarily involve term extensions or payment adjustments.

Liquidity remains robust, with interest-earning balances at the Federal Reserve Bank totaling $2.8 billion at March 31, 2025. The available-for-sale debt portfolio, valued at $9.3 billion, provides significant liquidity despite holding an unrealized net loss of $832.9 million, primarily due to changes in interest rates. Approximately $1.4 billion of this portfolio is expected to mature or pay down over the next 12 months. Core customer deposits constitute a stable funding base, representing 90.9% of total deposits. The company also has substantial borrowing capacity, including $6.1 billion available from the FHLB and Federal Reserve.

Capital management is strong, with CBSH exceeding all regulatory capital adequacy requirements and maintaining ratios well above the levels for well-capitalized institutions at March 31, 2025. The company fully phased in the estimated capital impact of the CECL accounting standard during Q1 2025. Shareholder returns are prioritized through a treasury stock buyback program and a consistent dividend policy, marked by a 7% increase in the quarterly cash dividend in Q1 2025, representing the 57th consecutive year of increasing the regular cash dividend per share.

Outlook and Competitive Dynamics

The macroeconomic environment presents ongoing considerations. The macroeconomic forecast highlights "significant policy uncertainty" related to potential U.S. tariffs and federal worker layoffs, which could impact inflation, labor markets, and economic growth. Analyst expectations, as noted by Zacks Equity Research, project fiscal year 2025 EPS around $4.08 per share. Morgan Stanley's (MS) view on the midcap bank industry suggests that higher tariffs could raise recession risks, potentially weighing on loan growth and forward earnings, but they view Commerce Bancshares as a "more defensive play for a more challenging environment."

In the competitive arena, CBSH's regional focus and relationship banking model differentiate it from larger national banks that compete heavily on scale, technology, and price. While CBSH may face challenges matching the digital investment levels of giants like JPM or BAC, its deep ties within its Midwest markets and specialized product offerings provide a degree of insulation and pricing power in certain niches. The acquisition of FineMark Holdings is a strategic step to enhance its market position and expand its service offerings, particularly in wealth management, where FineMark has a strong reputation.

Key risks to monitor include the impact of macroeconomic uncertainty on credit quality and loan demand, fluctuations in interest rates and their effect on net interest income (as illustrated by interest rate sensitivity), and the ability to effectively compete with larger institutions on technology and scale. The concentration in certain loan portfolios, such as multi-family residential construction and business real estate, also warrants attention.

Conclusion

Commerce Bancshares stands as a resilient regional bank with a long history of profitability and a strong commitment to its shareholders, evidenced by its remarkable track record of dividend increases. The company's Q1 2025 performance underscores its operational effectiveness and ability to generate solid earnings amidst a dynamic economic backdrop. While navigating a competitive landscape increasingly shaped by technological advancements and the scale of national players, CBSH leverages its core strengths in relationship banking, regional expertise, and diversified business segments. The strategic acquisition of FineMark Holdings positions the company for targeted growth. Investors should weigh CBSH's stable financial health, prudent risk management, and strategic initiatives against the potential impacts of macroeconomic uncertainty and competitive pressures, particularly in the digital realm, as key factors influencing its future trajectory.