Could Commerce be ripe for a sale?

Vernon W. Hill II's ouster last week from Commerce Bancorp Inc. sparked speculation that the Cherry Hill company will soon sport a "for sale" sign. But a sale of the biggest bank based in the Philadelphia region is far from a sure thing.

"It's in play, and that's why the stock is up today," Gary B. Townsend, an analyst at Friedman, Billings, Ramsey & Co. Inc., said Friday, the day of Hill's departure amid a federal investigation of insider deals.

Commerce executives said they intended to keep the bank independent, with an emphasis on opening new branches. "Our plan is to stay the course with what's working so well for us," Dennis M. DiFlorio, chairman of Commerce Bank, said during a conference call.

Executives and analysts said Commerce was extraordinary in having reached $47 billion in assets by building a branch network from scratch, rather than through acquisitions.

Townsend estimated that Commerce could be worth $9.9 billion, 40 percent more than its stock market value Friday, when shares closed at $36.99, up $3.18, or 9.4 percent.

In a conference call Friday with analysts, Robert D. Falese Jr., Commerce Bank's president and chief executive officer, touted the 10-year annual return to shareholders of greater than 20 percent, more than doubling the return of the Standard & Poor's 500 index.

However, over the last three years through Thursday, Commerce's average annual return was 3 percent, compared with the 12 percent return for the S&P 500.

A change in interest-rate trends had caused Commerce's stock market gains to slow.

Commerce's strategy has been to gather lots of relatively low-cost deposits by building many branches each year, keeping them open long hours, and providing other convenient services.

What Commerce does with those deposits is invest them in long-term government securities, which pay the bank a higher rate than it pays depositors. That is called the net interest margin.

"That's been a very effective strategy for 30 of Vernon's 34 years," said W. Kirk Wycoff, a Philadelphia banking veteran who starts tomorrow as managing partner at Patriot Capital Partners, which will invest in start-up banks.

For the entire banking industry, that net interest margin has narrowed as short-term interest rates - or yields - have climbed without a corresponding increase in long-term rates. The normal "yield curve" slopes upward from short-term to long-term rates.

The flat or sometimes even inverted yield curve in recent years hurt Commerce more than many of its larger competitors, which have a broader array of fee-based businesses.

Commerce's dependency on the yield curve turns the other way, too. "We believe that Commerce will be among the greatest beneficiaries of a normalizing yield curve," Mark Fitzgibbon, director of research at Sandler O'Neill & Partners L.P., said in a research note on Commerce.

Fitzgibbon said he thought there was a strong possibility that Commerce would be sold within a year, but he said it was likely that company management and the board would wait until earnings rebounded.

The fate of the Commerce brand and business model, which was designed with an emphasis on gathering large amounts of deposits, depends on the buyer.

Analysts said a domestic acquirer would buy Commerce for the branches and the deposits and would be unlikely to preserve much of the Commerce way of doing business - unless the buyer were a large national bank without much of a retail presence.

"Banks don't acquire brands, they acquire other assets," said William Madway, a visiting professor of marketing at Villanova University. Madway said the key to Commerce was its success in marketing itself as the most convenient bank, with longer hours and other conveniences, such as free coin counting for anybody.

"A foreign acquirer has more flexibility, would be more apt to leave the existing model alone," said Friedman, Billings' Townsend.

Wilson T. Smith, a banking analyst at Boenning & Scattergood Inc., of West Conshohocken, said Commerce's board and management were probably not going to want to sell.

He said the executives in the new office of the chairman were eminently capable of running the company. "These are the same people who have been executing day in and day out for the last 15 years," he said.

At the same time, the board is going to have to deal with new committees and the knowledge that they are "getting more scrutiny than ever before," Smith said.

"I think, if they got a strong offer that was just presented to them, that they may just feel that they should take it," he said.


Contact staff writer Harold Brubaker at 215-854-4651 or hbrubaker@phillynews.com.