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BANK PROFILE: COMMERCE BANCORP 80 with Janney Montgomery Scott Inc. in Philadelphia, adding that unlike most banks, Commerce doesn’t depend on its own share price to fuel acquisitions and therefore growth. The bank attracts business, analysts said, because it stands apart from others in its hiring, its training and follow-through. Legend has it that job candidates are deemed unsuitable if they do not smile with the first 30 seconds of an interview. At the other end of the process, “mystery shoppers” visit Commerce branches 100,000 times a year, meaning that someone is sizing up each of more than 300 branches and writing a report about each one of them nearly every day. Not everyone, however, is convinced that the growth and market share gains are sustainable. For example, Thomas Monaco, an analyst with Moors & Cabot, a Boston-based brokerage firm, says that consumer deposit growth comes mostly from opening costly new branches. Once they are open a year or two, he said, consumer deposit growth trails off. That has been masked, he said, by a growing government deposit business. And the government business may have trouble ahead, he adds. Two Commerce executives were convicted in May of conspiracy charges in a municipal corruption case in Philadelphia. The executives were charged with helping a city official get personal loans on favorable terms in exchange for his steering city business to the bank. Whether Commerce backs off from pursuit of government business or local governments shy away from Commerce, the impact could be big, Monaco expands. Other analysts say they fear that additional improprieties in soliciting government business could surface, tarring the company directly next time around. In addition, analysts have expressed concern that a relatively unusual balance sheet could cause trouble if interest rates rise sharply. With loans on Commerce’s books totaling just 35% of deposits, the bank has a large portfolio of fixed-rate securities. The value of these securities could plummet if rates rise.That would deplete the equity that the bank needs to continue opening branches, Monaco adds. The biggest reasons for concern might be the possibility that the industry giants are getting their retail act together. NEW DEPOSIT ACCOUNTS – January 2005 Wachovia 12% Sovereign 3% Sun Bank 1% Commerce 32% Metro Philadelphia Wilmington Trust 2% Repeat Sales Credit U 3% 41,705 Accounts Fleet/BOA 6% Citizens 4% PNC 9% Other 28% Bank of NY 2% North Fork WAMU 2% 3% HSBC 3% Chase 10% Citi 7% Wachovia 4% Metro New York Commerce 31% 87,450 Total Accounts Repeat Sales Fleet/BOA 8% AFSB 2% PNC 2% 45,745 Accounts Other 26% DEPOSITS Billions $ 33 30 27 24 21 18 15 12 9 6 3 0 $5.6 120 39% A verage Deposit Growth $7.4 150 $10.2 184 2.38%* 2.84%* 2.25%* 1999 2000 2001 2002 2003 2004 # of Branches * Deposit Cost of Funds Analysts and consultants also say that banks that grew large through acquisitions have vastly improved their customer service in the last few years, partly in response to Commerce and other smaller banks taking business from them. Big New York banks just did not believe that Commerce’s approach to retailing would resonate with consumers, says Wendel, the industry consultant. Now, Washington-area banks appear to be gearing up for Commerce’s arrival. For example, PNC Financial Services Group Inc. of Pittsburgh, which just moved into Washington with an acquisition, said in April that it would extend its weekday hours and add Sunday hours in the nation’s capital. To be sure, just about everything that Commerce does to attract customers can be copied. In addition to keeping longer hours, a few other banks have installed coin-counting machines in their branches. Working in Commerce’s favour, however, is the strong possibility that creating a retail experience and a brand identity that complements that experience by imitating an original thinker is not so easy and that competitors are not really committed to it anyway.“Most of the banks that have tried to do this have implemented one, two, three or four of the kinds of things that Commerce does,” says Mark T. Fitzgibbon, co-director of equity research for Sandler O’Neill & Partners LP, a New York-based investment bank BRANCH PROFITABILITY ANALYSIS – Results in millions Fully allocated support costs approximate 1.50% of total deposits $14.5 Average Average First Two Suburban Manhattan Branch Branches (annualized) Total Deposits $100.0 $250.0 Total Income 5.2 12.4 Total Branch Operating Expenses (1.3) (3.7) Net Pre-Tax Income $3.9 $8.7 224 1.34%* $20.7 270 42% .82%* $27.7 319 34% .84%* JULY/AUGUST 2005 • <strong>FTSE</strong> GLOBAL MARKETS
that specialises in financial companies.“But they have not implemented the other 65.” So, even when competitors borrow an idea, they do not necessarily pull it off with the same élan. It is one thing, for example, to install machines in branches that quickly count huge quantities of unsorted coins. Commerce’s machines look like arcade games, with sounds and flashing lights. And just to make it amusing, Commerce invites visitors to try to guess how much all their coins are worth. If they are close, the bank gives them token prizes, such as a plastic piggy-bank “C” in Commerce’s trademark red. But that is not all. Wendel discovered when he took his young son and a huge jar full of coins to a Commerce branch, intending to have some fun counting the money. The coin counting machine was broken the day they visited, but the branch manager was not about to let the youngster go home disappointed, Wendel said. Without missing a beat, the manager called another branch, to make sure its machine was in working order, and then gave Wendel money to cover a taxi ride to the other office.“That was an amazing customer experience,”Wendel says. Competitors might dispute Hill’s assertion that he is the only one pursuing revenue growth. They would be hard pressed to argue, however, that Commerce does not spend generously, on items large and small, in that pursuit. For example, Commerce only takes the best locations when it opens new branches, says Jacqueline Reeves, a bank stock analyst with Ryan, Beck & Co., a New Jersey-based brokerage firm, even though it invariably pays more for them than other sites around town. One such site gives Hill a chance to chuckle occasionally at Chase’s expense. A photograph in Commerce’s standard analyst presentation shows a building at the corner of Fifth Avenue and 14th Street in New York. Commerce signs adorn the windows on the first floor, immediately below Chase signs. Chase, Hill explained, gave up its lease on the first floor, presumably to cut its sky-high Manhattan occupancy costs, and held onto space it had on the second floor. Commerce moved into the first-floor space, which is more accessible to customers and prospective customers walking by. The Commerce branch ASSET QUALITY Non- Performing Assets Charge-offs Loan Loss Reserve 12/01 12/02 12/03 .17% .11% .11% .11% .19% .18% .16% .19% 1.46% 1.56% 1.51% 1.43% Non-Performing Loan Coverage 398% 640% 515% 413% Credit Rating: A-2/P-1 <strong>FTSE</strong> GLOBAL MARKETS • JULY/AUGUST 2005 12/04 Top 60 Banks 0.60% 0.537% 1.52% 278% has $59m in deposits, more than thousands of bank branches around the US that have been open for many years longer than Commerce has been in New York. At the more modest end of the spectrum, where other banks tether a pen to a counter for customers to prepare routine forms, Commerce fills boxes with dozens and dozens of writing implements. Hill says the bank gives away 1m pens a month and would be happy to push that figure to 2m.“The average bank would say,‘How do we get our pen costs down,’”he says. Only time will tell how long Commerce’s high-cost approach to business can generate outsized earnings growth. Unless the model falters badly, however, it is unlikely that big banks will take Commerce for granted again. The Citis and Chases and Banks of America of this world regularly boast that their vast branch systems and even vaster networks of automated teller machines give unparalleled access to their customers’ accounts. But Commerce, which calls itself “America’s Most Convenient Bank”, appears to have neutralised that big-bank advantage and given clear meaning to what could easily be an empty slogan with a new costly program recently. The bank announced in March a wide-scale program to rebate automated teller machine fees that machine owners and other financial institutions charge its customers. It said it would cover the cost of using all machines, worldwide, for customers who have $2,500 in their checking accounts. Clever slogans are not necessarily hard to come by. But it certainly difficult for competitors to argue that cost-free access to customer accounts around the world is not pretty convenient. 2004 SUMMARY Total Assets Total Deposits Total (Net) Loans Total Revenues Total Expenses Net Income Net Income Per Share $30.5B 27.7B 9.3B +34% +34% +27% $1,392.9M +28% 938.8M +23% 273.4M +41% $1.63 +26% 81
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