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CHERRY HILL, N.J. — Commerce Bancorp grew its deposits by an astounding 32% last year, compared with an industry average of about 4%. Over a five-year period, the compound annual growth rate is 22%. This $8 billion-asset bank must be paying some pretty attractive rates, right? Actually, no. In most deposit product categories, Commerce Bancorp pays slightly below its market, which is a geographic area covering most of New Jersey and parts of Pennsylvania and Delaware. The institution's leading product is a non-interest-paying checking account that imposes no fees for customers who maintain a $100 minimum balance. "It's all about convenience," says chairman and president Vernon W. Hill 2d. He reasons that rate-conscious investment money will go to Wall Street anyway. So what he's after is "working capital," which can be lured into the bank with convenience and top-notch service. For Hill, convenience means seven-days-a-week service, expanded hours, and sparing no expense on branches. Each outlet is based on a standardized design that emphasizes expansive, well-lit interiors and elegant furniture and carpeting. Hill recently equipped service reps with flat PC screens at $1,000 apiece simply because he thought customers would be impressed with their sleek, modern look. What other U.S. bank would do that? And what other bank would spend $6 million installing coin-sorting machines in branch lobbies and then offer the service free of charge, to customers and non-customers alike? For that matter, who else in this size category is building new offices at the rate of about 30 a year? It's quite a departure in an era when most of the industry is focused on efficiency and cost-cutting. To illustrate, Commerce Bancorp's noninterest expenses ate up 73.4% of its operating revenues in 2001's fourth quarter, while the weighted average ratio for the top 50 banks (excluding Citigroup) was 62.6%. But Hill doesn't care, and he actually dismisses the so-called "efficiency ratio" as irrelevant. He's focused on a low cost-of-funds, which in turn gives him a wider net interest margin (4.62% last year) than most of his peers. Hill spends more on his branches, and attempts to make up for it by bringing in more lower-cost deposits and then lending that money back out at a more attractive spread. Commerce Bancorp has grown its revenue, net income and earnings per-share at high double-digit rates for the past five years. "The normal bank model is relatively low cost-to-run, relatively high cost-of-funds, and no growth. My model is very low cost-of-funds, high cost-to-run and explosive growth." That's not the whole story, however. Hill critically relies on two other forms of efficiency — capital and credit — to generate respectable shareholder returns. Equity equals about 6% of assets at Commerce Bancorp, compared with a roughly 7.5% weighted average ratio for the top 50 banks excluding Citigroup. A reported fourth quarter ROE of 18.4% would have dipped below 14% had Hill maintained the top 50's average level of equity. The beauty of Hill's model is that he does not have to load up on risky loans to get the asset yields needed to achieve attractive spreads on his core funds. Commerce Bancorp's 49% loan-to-deposit ratio compares with a 91% average for FDIC-insured commercial banks. With nearly half his balance sheet in low-risk bonds, Hill can present more than adequate risk-adjusted capital ratios to regulators, even though his equity base is comparatively low when calculated according to generally accepted accounting principles. The bottom line: Hill should enjoy clear sailing as long as he can maintain Commerce Bancorp's sterling credit quality (at yearend, his balance sheet had half the proportion of problem loans as the average top 50 bank). There must be something to his credo: It's the deposits, stupid! — Kenneth Cline Close this window to return to the article. |