- The Washington Times - Monday, October 31, 2005

MOUNT LAUREL, N.J. - If your bank is open on Sundays or has removed the bulletproof teller windows, you might have Commerce Bank to thank. The Cherry Hill, N.J.-based bank, found only in the Philadelphia area five years ago, is establishing itself up and down the East Coast and has become influential in the banking world.

In mid-October, Commerce had 348 locations with plans to have about 375 by year’s end. Most are in the New York and Philadelphia areas, though Commerce entered the Washington area earlier this year and plans to expand into Boston eventually.

The bank, led by iconoclastic Burger King franchisee Vernon Hill, has grown quickly because of a business strategy that not long ago seemed counterintuitive: Opening branches while other banks were paring down locations to concentrate on telephone and online banking. The bank uses convenience and a zealous commitment to customer service to gather as many deposits as possible.

“I think they’ve done a terrific job in understanding the markets, better than anyone I can think of,” said Gary Townsend, a banking analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va. “They understood earlier than most how powerful this retail banking model can be.”

The core of Commerce’s philosophy — making money mostly by investing deposits rather than by making loans — still bothers some analysts. Industry followers have an uncommonly wide range of opinion about how much Commerce’s stock is worth: Some say it’s severely undervalued; some say it’s trading for a lot more than it’s worth.

“Vernon would like to be valued as a retail stock when he’s really a bank. The debate goes on,” said Thomas Monaco, who follows Commerce for Boston-based Moors and Cabot Capital Markets and believes the bank’s stock is overpriced.

Mr. Hill does not seem worried about that criticism, or the frequent criticism that Commerce uses political donations to get business.

“A lot of people call us the anti-bank bank and the agent of change,” Mr. Hill said in a telephone interview. “When you’re the agent of change, you’re always going to get vocal supporters and vocal critics. Today’s criticism is: Can they keep it going?”

Mr. Hill, whose confidence never wavers in public, says the answer is yes.

It’s a popular answer around Commerce, where employee e-mail addresses end in “yesbank.com.”

While the bank keeps expanding, the past few months have brought a lukewarm financial picture. The company announced in September that it would miss earnings expectations for the third quarter, then announced quarterly profits in October that were even lower than the downgraded expectations. The stock has been trading lately in the $29 range, down from a high of $35.98 in August. Commerce Bank stock gained 48 cents yesterday to close at $30.47 on the New York Stock Exchange.

The problem is one that affects other banks, too: Commerce has been paying customers rising interest rates on deposits while still collecting low rates on loans, putting a squeeze on profits. Mr. Hill said the problem will resolve itself as the Federal Reserve adjusts rates.

Most of Commerce’s stores — the bank doesn’t call its branches “banks” — are laid out the same way: bright red and full of light. The hours are long, with either drive-through windows or lobbies open until 8 p.m. during the week.

Commerce has free coin-counting machines and lets its account holders use ATMs — even those at other banks — for free.

Some industry watchers say Commerce’s influence is one reason that megabanks such as Bank of America Corp. are becoming more focused on customer service.

Mr. Hill says he doesn’t think of Bank of America as a role model. Instead, he looks to what he calls “power retailers” such as McDonald’s Corp., Home Depot Inc. and Starbucks Corp. for inspiration. And none of them expanded through mergers.

“We believe that no great retailer has ever been built by doing deals,” he said.

Commerce has been increasing the number of its branches by about 18 percent per year, a rate Mr. Hill has told investors he intends to continue even if it means sacrificing profits in the short term.

Mr. Hill believes there is enough room for 1,000 Commerce branches in its existing and projected East Coast markets.

Commerce’s expansion has not been without problems. Earlier this year, bank executives Glenn Holck and Stephen Umbrell were convicted of approving loans to Philadelphia’s treasurer to get the inside track on city banking business. Both men were sentenced to more than two years in federal prison.

Mr. Hill would not comment on the case other than to say he believes the convictions will be overturned on appeal.

Commerce has tried to distance itself from politics. Last year, it stopped underwriting government bonds. And amid reports that the federal government was looking into the political giving by the bank, Commerce’s political action committee stopped making contributions in 2003 — a step its competitors have not taken.

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