Deleveraging at Commerce Banc

Commerce Bancshares, Inc.'s (CBSH - Analyst Report) diluted operating earnings of $0.63 per share were two pennies ahead of our estimate. Earnings were driven by stable net interest margin and strong growth in non-interest revenue, while the expenses remained under control. Credit metrics remained stable during the quarter. We maintain our Hold recommendation on the shares.

EPS growth remains a concern. Loan growth has been improving, with average loans rising an estimated 12% year over year in 2007, and 9.5% year-over-year in 1Q08. But planned de-leveraging of the securities portfolio has offset much of the loan growth in recent periods. With average securities still equaling 23% of average earning assets in the 1Q08, we expect that more de-leveraging will take place.

CBSH currently trades at 14.0 times the consensus forward estimate, a 53% premium to the peer group median. On a price-to-book basis, the shares trade at 1.89 times, a 51% premium to the peer median. Our six-month price target of $44 per share equates to a P/B multiple of 1.9 times our estimated book value per share six months out and also equates to 15.2 times our 2008 earnings estimate of $2.90 per share. With the $1.00 per share annual dividend, the target price implies a 7.2% expected total return over the period.

Read the full analyst report on CBSH