I'm not sure quite how many emails I've received from angry Commerce Bancorp (NYSE:CBH) shareholders telling me that I "don't get it" because I insist upon reviewing and analyzing Commerce as though it were a bank. By their logic (and I use that term loosely), Commerce is more of a retailer than a banker and is such a game-changer that it shouldn't be tied down by the normal metrics of banking.
Well, looky here -- Commerce announced (via an 8-K filing) that earnings estimates for the third and fourth quarter are too high. It appears that the bank will report $0.45 in earnings for each period versus estimates of $0.47 and $0.49, respectively. The culprit? A decidedly hard-core banking concept called a flat yield curve.
What do we mean by a flat yield curve? Well, usually when the Fed raises short-term rates, the long-term rates also go up and the yield curve keeps more or less the same shape -- higher long-term rates, lower short-term rates. By and large, this is good for banks, which borrow short-term (in the form of deposits) and lend/invest long-term (in the form of multi-year loans or securities). Well, this time around, though, the long-term rates have stayed pretty sticky. So instead of that normal upward slope from short-term to long-term, the line is flatter than normal, and that's hurting earnings for many banks.
The news for Commerce isn't all bad, though. Deposit and loan growth are both still robust (up 29% and 26%, respectively) according to that same 8-K filing, and the company is continuing an aggressive branch expansion plan. Further, slower earnings growth caused by a lower net interest margin (that is, the margin between borrowing and lending) is likely to be only a relatively short-term phenomenon. But it does highlight that Commerce is still a bank and that normal banking analysis is still important. After all, if the company had a better efficiency ratio (a measurement of operating expenses), it might have a bit more room to absorb the shrinking rate spreads.
With today's steep 7% share drop, Commerce shares are starting to get pretty interesting to me. Yes, there has been controversy of one kind or another around this company for some time, but the growth potential is undeniably appealing. So while this isn't the safest name in banking, it could be an interesting opportunity for more risk-tolerant investors.
Conservative types should probably stick to the likes of Fifth Third (NASDAQ:FITB) or BB&T (NYSE:BBT), but for those who can look at higher-risk/higher-reward situations, this could be the sort of momentary stumble that lets you get in at a better (and safer) price.
For more Takes to bank on:
- A Closer Look at Bank Stocks
- Doral Management Gets the Heave-Ho
- The Business of Commerce
- Commerce Bancorp: Growth at What Price?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
