Fashioning itself after the retailing industry, Commerce Bancorp (NYSE: CBH ) refers to its banks as "stores" and emphasizes customer-friendly offerings -- for example, the "stores" stay open past 5 p.m. on weekdays and are open on weekends. Sounds like an interesting differentiator in the stodgy, cutthroat banking industry, so why aren't all investors fans of the stock?
Commerce primarily operates in the ultra-competitive Northeast region of the U.S., where its competitors include State Street (NYSE: STT ) , North Fork Bancorp (NYSE: NFB ) , M&T Bank (NYSE: MTB ) , and Valley National Bancorp (NYSE: VLY ) . The company isn't overly large -- it just opened its 400th location -- but it has been growing rapidly and targets 15%-20% growth in its store base annually. Stores provide the traditional banking services: checking, savings accounts, and most types of loans. The company's competitive advantage lies in the extended hours stores remain open, as well as a focus on more personalized customer service.
For the quarter, net income per share fell 9% to $0.41. Total revenue growth of 15% and a 21% increase in deposits were offset by a flatter yield curve that shrunk the net interest margin to 3.27%, down from 3.39% in the second quarter and 3.67% in the same quarter last year. The company also spends aggressively to open new stores at a double-digit pace.
Net interest income grew 12% in the quarter and was attributed to asset and deposit growth as the company opens new stores. Non-interest income (excluding investment securities gains) grew 26%; this segment consists of deposit charges and service fees, as well as insurance, capital market, and brokerage fees.
Commerce's return on average assets was 0.74% for the quarter, down from 0.92% last year and at the low end of the 0.60%-1.50% historical range for banks. Return on average equity fell to 12.06% from 16.62% last year, which is also toward the low end of the historical range of 10%-25%.
Commerce also details same-store deposit growth, similar to retailers' same-store sales metric, which is unique for a bank. For the quarter, comps grew 13% at stores open more than two years and 16% at stores open more than one year. Those double-digit figures sound enticing, but are difficult to put into context, since other banks don't generally report same-branch figures.
Commerce is one of the more growth-oriented banks investors will find. As a result, it tends to trade at a higher multiple of earnings and pay a lower dividend, as it is focused on reinvesting capital back into the business rather than paying it out to shareholders. That also makes it more controversial, as the slower-growing, more established banks tend to report higher and more steady returns on assets and equity. Bulls brush this off, believing that Commerce is focused on expanding rapidly and needs to spend to keep growth chugging along.
It's a tough call. Commerce, like any growth stock, is undoubtedly a riskier proposition, thanks to constant fears that expansion will come to a screeching halt along with profitability. Former Fool contributor Stephen Simpson also recently highlighted that securities held outnumbered loans on the balance sheet to the tune of 2:1. However, that ratio appears to have fallen to 1.7:1 this quarter, and while that is unusual compared to most banks, I'm not sure of the extent of risk that condition implies.
If growth is important in your portfolio and you're also looking for some banking exposure, Commerce could be a good bet if it continues to grow at its historically impressive rates. If income and stability is your game, then any of the larger banks are worthy of consideration, including Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) . In any case, Commerce is expected to continue growing its store base. It should be one of the more dynamic banks to follow going forward, thanks to its customer-centric focus.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.