Commerce Bancorp: Still Controversial

I like it that nobody seems to agree on Commerce Bancorp (NYSE: CBH  ) . People think either that it's heading up a game-changing new approach to consumer banking, or that it's an inefficient and unappealing company that will ultimately falter under the burden of its expenses. Since I'm neither long nor short on the stock, it doesn't really matter to me, so I can sit back and enjoy the show.

Like so many other quarters from Commerce Bancorp, this one mixed the good and bad news. The "good" was that the company again posted exceptional loan and deposit growth while it also produced double-digit growth in both net interest income and non-interest income. The "bad" was that expenses led to no real growth at the bottom line, and valuable ratios such as return on assets, return on equity, and net interest margin continue to sink.

Even the bank's most ardent critics have to acknowledge that Commerce is currently a deposit-gathering machine. Core deposits rose more than 24%, and that's the kind of growth that a bank such as National City (NYSE: NCC  ) , Fifth Third (Nasdaq: FITB  ) , or M&T (NYSE: MTB  ) can only dream of. On the other hand, what's 24% deposit growth worth when you can't grow your bottom line because you're spending so much on non-interest expenses to get those deposits?

It's also important to note that Commerce is unusual in how it manages its balance sheet. Most banks have some amount of securities on the balance sheet, but at Commerce, securities outnumber loans almost 2 to 1. And though it's true that those securities are outyielding the deposits that pay for them, it's also true that the cost of those deposits is rising faster than the yield on the securities.

Perhaps I'm stubborn in holding to more traditional ways of valuing and analyzing banks, but I don't see why I should abandon an approach that has made me plenty of money in the past. After all, no single stock is likely to be worth scrapping an otherwise profitable system. With that in mind, I'll continue to sit on the sidelines and watch this story develop. After all, it's not often that you see this much growth and controversy in a banking name, so it's likely to be a volatile name for some time to come.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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