Controversy and disagreements over valuation have both been active discussion points for Commerce Bank (NYSE:CBH) over the years, and that's not going to change anytime soon.
Yesterday, Commerce announced that the company and its officers are under investigation by the Office of the Comptroller of the Currency and the Board of Governors at the Federal Reserve Board. The outcome is uncertain, and neither the company nor its officers can publicly discuss the situation, but it's bad news in the short term.
Fortunately, some other items from the company's recent earnings release deserve a mention -- including a summary of its financial results, which can be found in the Fool by Numbers published yesterday.
It wasn't anywhere near the best quarter or year in Commerce Bank's history, but this also isn't anywhere near the best environment for banking. The inverted yield curve continues to make the business of banking difficult as it drives up the cost of short-term deposits, while the yields on longer-term investments remain low. But Commerce excels -- and can partially compensate for a tough environment -- in its ability to gather cheap deposits. Metro New York continues to be its strongest market for growth in deposits, with deposit growth of 25% despite the presence of strong, established banks such as Citigroup (NYSE:C), Wachovia (NYSE:WB), and Income Investor selection JPMorgan Chase (NYSE:JPM). To drive future deposit growth, the company is rapidly expanding in the Washington, D.C., and southern Florida markets.
Commerce Bank has always been focused on customer service, a key to its strategy in driving deposits. However, with the cost of deposits getting more expensive, and the yield curve also lowering returns, the company is focusing on controlling its operating costs. I think this makes sense, given its current operating environment. But cost control isn't the company's historical strong point, since its efficiency ratio has consistently topped 70% (lower is better). For fiscal 2006, its non-interest expenses exceeded its net interest income. It'll need a fine balance to control costs without derailing the customer-oriented focus that has driven such substantial deposit growth.
At $31 a share, Commerce trades about where it did two years ago, despite a decent performance over that period in a tough time for banks. As long as an investigation is hovering over Commerce, its share price will likely be held down in this area. Investors with the time and inclination to go through the company's loan and investment portfolio and accurately assess what's priced into the share price may find that Commerce is a bargain, but acting on that analysis will be tough without being able to assign a worst-case scenario for the current investigation into the company's transactions with its officers.
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At the time of publication, Nathan Parmelee had no financial position in any of the companies mentioned. The Fool's disclosure policy is surprisingly good at badminton.
