Commerce Can Shake Off Criticisms

Even if we assume growth has slowed, it is far from a sign of impending doom. Organic growth of 18% is extraordinary for a company in any category. Every banker in the country --- with the notable exception of Commerce CEO Vernon Hill --- would be thrilled if they could achieve a third of that rate.

My valuation model, by the way, assumes a gradual slowing to a 15% rate over the next four years. More than a third of Commerce stores are 3 years old or newer. As the store base matures, it's reasonable to expect deposit growth will moderate. The average Commerce store has collected $120 million in deposits and is gathering new deposits at a pace of $20 million per store per year. By way of comparison, it takes branches of other banks about 10 years, on average, to accumulate $50 million worth of deposits.

Balance Sheet

"Perhaps most worrisome are concerns about the bank's liabilities" is a criticism that sounds scary, but is inconsistent with the facts. Commerce's balance sheet is quite healthy, with no long-term debt and credit risk far lower than its peer group.

Eisinger selected one issue from the balance sheet to make his "most worrisome" case, but then failed to identify a critical mitigating factor. Here's the issue: Commerce generates deposits much faster than it can make loans. Rather than get aggressive in lending and absorb extra credit risk, Commerce invests a large percentage of those deposits in AAA-rated income securities, such as mortgages. These fixed-income instruments mature in four years, on average.

Because interest rates have recently moved up, the market quote for these securities has declined. As a result, Commerce has a "paper loss" on these securities. As Eisinger points out, if Commerce holds the securities for the duration (about four years), there is no actual loss, because it will receive 100% of the face value. So far, so good. This is an issue worth noting.