Commerce Bancorp (NYSE:CBH) is confounding.
This fast-growing bank is prospering from a maverick viewpoint on how to operate a retail banking corporation. But that same maverick viewpoint leads to problems with analysis. Put simply, how much leeway do you give the company for its growth?
As the bank pre-announced, the third quarter was tough. Well, sort of -- there were areas of disappointment, but there were also some clear signs of strength. Revenue climbed 13%, net income rose 13%, and earnings per share were up 7% -- not exactly the kind of growth that investors want to see. Return on assets and return on equity also dipped, and the former is quite low indeed relative to other banks. And as everybody knew would happen, net interest margin compressed to 3.67% -- a nasty drop from last year's 4.29%.
Loans, however, grew 27%, and core deposits climbed 29%. Without a lot of acquisitions, that's an incredible growth rate. With such robust growth, Commerce overcame the narrower margin, and net interest income grew 9%. That couples nicely with non-interest income growth of 25% (11% when excluding investment gains). Credit quality was also extremely good, and non-performing assets were only 0.09% of total assets.
Turning back to deposits, the company is performing exceptionally well. The bank is paying an average of only 2.11% for its deposits, and that's a pretty competitive rate indeed. Nevertheless, I'm a little flummoxed by the loan-deposit ratio. Maybe I'm missing something here, but it seems way too low. Deposit growth continues to outstrip loan growth, and looking at average balances, the ratio was below 50%.
As a result, the bank has the majority of its assets in investment securities. The trouble with that is that the company's loans earn about a point and a half more interest than those securities. Now, both are above the cost of funds, so it's profitable either way. Still, with such high-quality credit and low-cost deposits, I wonder why there isn't more loan growth. Now, there's a hidden upside to this -- the company continues to accumulate low-cost funds, and once the yield curve gets back to normal, there could be some impressive profit potential lurking here.
Commerce Bancorp is certainly smaller than the likes of Citigroup (NYSE:C), Bank of America (NYSE:BAC), ABN Amro (NYSE:ABN), and Fifth Third (NASDAQ:FITB), but small doesn't mean simple. This bank strikes me as just plain weird -- great growth potential, but high expenses and low returns on assets; very cheap deposits, but a pretty low loan-deposit ratio. All the same, this stock is getting increasingly interesting to me. There are above-average risks here, but I can't overlook the potential of those low-cost deposits.
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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).
