Banking, Retail-Style
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From a sun-drenched, warm conference room in his prototypical branch in Florida, Commerce Bank CEO Vernon Hill points out the features of his template location. On the far wall inside the newly built branch is a mural of a steam train stopping at a yesteryear station in Boynton Beach, the branch’s home. Every Commerce branch gets a mural depicting a local scene. Hill himself flips through archival photos as part of the selection.
Against another wall is a different fixture, a coin-counting machine where customers and non-customers alike can dump their loose change and get a receipt to take to a teller for larger denomination currency — a hugely popular, free service at the New Jersey bank’s branches up north. The lobby itself is spacious, the windows large, the lines short, the operating hours long. The bank opens seven days a week, from 7:30 a.m. until 8 p.m. Monday through Saturday and from 11 a.m. to 4 p.m. Sunday. The Boynton branch sits on a pricey corner, the kind of expensive site ($3.7 million) banks tend to leave to Walgreens and CVS in favor of cheaper, less convenient locations in midblock or at less critical intersections. Employees, even the one getting into his car at the end of his workday, are — by nature or by training — hotel-concierge friendly.
| Update (June 30): Commerce Bank founder forced out. Read story from Jersey Shore Now |
Commerce plans a total of 150 such branches over the next several years in south Florida as it moves, retailer-like, to saturate the market. After that, the bank is expected to move into Orlando and Tampa.
Beginning in 1981, when what’s now Bank of America took over a Lake City bank, out-of-state banks flooded into Florida, snatching up local banks like colonial powers carving up a new continent. North Carolina’s Bank of America and Wachovia and Georgia’s SunTrust captured the market share leadership and held it through a series of acquisitions, while Alabama-based banks dominated a second-tier through a wave of deals. Commerce enters the market with a track record of seizing market share from established banks, expecting to break into Florida’s top rank as it did in Philadelphia and other large markets.
“It’s a retailing phenomenon,” says analyst Robert Patten of Memphis-based Morgan Keegan & Co. “The success of Commerce is really driven by the culture of Commerce, which is different than any other bank on the planet. Commerce has a retail philosophy, which we have called the Starbucks of banking. From the top CEO down, they drive this deep: The customer comes first. In a nutshell, they talk the talk and walk the walk.”
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In demeanor, Hill is reminiscent of builders of growth stock companies like Best Buy’s Richard Schulze and Home Depot’s Bernard Marcus. He talks in pithy declarations — “We think we’re in the retailing business, not the banking business” — and has a book coming out in October: “Fans, Not Customers.”
Banking wasn’t Hill’s first choice. He worked for one while studying at Wharton and didn’t see it as the path to riches. Instead, he went into real estate and developed sites for McDonald’s in the 1960s and 1970s. He says he founded Commerce in 1973 as “sort of a lark.” Fast-food expansion and service — he’s also a Burger King franchisee — influenced his thinking at Commerce. “Bankers believe the value is in making loans. We believe the value is in gathering deposits. That is a major differentiator,’’ he says. “Because of that we took the route, ‘Let’s give our customers this great retailing experience,’ and it all evolved from those simple ideas.” By customers he doesn’t mean just consumers — 58% of Commerce’s core deposits are in business or government accounts.
There’s a tradeoff for customers for the convenience and break on some fees; they don’t earn top rates on deposits. Hill has found that customers are happy to make that exchange. Because Commerce pays less for deposits, it can afford to spend more on sites like the one in Boynton Beach — and on staffing them. Hill says his locations usually cost $5 million for the land and building, but Commerce’s average branch accumulates $120 million in deposits, which is well above the industry standard. Because banks’ gross profit is generally 5% of deposits, he says, that translates into a $6-million gross profit for each Commerce branch, which, he says, is more than double the industry average.
“Bankers generally have given up on growth.
Florida is a little different, but across America, they’ve given up on growth.”
What’s more, deposits at the average Commerce branch grew $19 million last year, which, Hill says, is more than six times the industry standard. Says Hill, “In many ways, our model is the anti-bank model. The typical big bank model is relatively high cost of money, relatively low cost to run, no growth. Our model is lower cost of money, higher cost to run and very high growth.”
The higher cost to run — the long operating hours, extra staff and higher overhead in general — makes Commerce less efficient than the industry average. Its return on assets and return on earnings are subpar as well. And like other banks, Commerce is struggling with the yield curve. Profits grew only 6% last year, compared to 41% in 2004. But unlike most of its peers, it’s a growth company. “Bankers generally have given up on growth. Florida is a little different, but across America, they’ve given up on growth,” Hill says. “So if you can’t grow, you cost-save your way to prosperity. And if you can’t cost-save your way to prosperity, you sell to somebody else who tries to cost-save more. We reject all that.”
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Instead, Commerce grows by taking market share, as it did with notable success after First Union (now Wachovia) mishandled the acquisition of Philadelphia’s CoreStates in 1998. Commerce is now a top five bank in the Philadelphia metropolitan area. Commerce also prospered following Boston-based FleetBoston Financial’s (now Bank of America) acquisition in 2000 of New Jersey’s Summit Bancorp. “Sink the Fleet” was what Hill dubbed his internal marketing campaign to win unhappy Summit customers.
Commerce “did a pretty good job,” says analyst Gary Townsend of Friedman Billings Ramsey in Arlington, Va. “They do try to suck all of the oxygen out of the atmosphere as far as competitors are concerned. Commerce is quite formidable. What we can expect (in Florida) is Commerce will have a good degree of success.”
Commerce moved into Florida in 2005 with the purchase of the small ($370 million assets), seven-branch Palm Beach County Bank for $110 million. It closed two branches, opened the new one in Boynton Beach and one in Boca Raton, renovated the other five and started building its network. (Commerce moved into D.C. the same year.)
Unlike Commerce’s other markets, Florida is known for savers sensitive to the best rates. John Tolomer, Commerce’s Florida president, says that while it’s rare for Commerce to have the highest rates, it doesn’t charge fees other banks do and offers conveniences others don’t. Florida also is known for its fragmented market and a relatively large number of startup banks that are acquired by others — making for the kind of dislocation Commerce thrives on. Hill predicts bank formation will slow as smaller banks find it impossible to cover the compliance costs of anti-money laundering laws. And there’s the real estate crunch. “I literally get a book about a bank in Florida for sale every week,” Hill says.
Tolomer led Commerce’s expansion into Westchester County, N.Y., and Fairfax County, Conn. Hill believes that it’s easier to teach a Commerce veteran a new market than teach a local banker the Commerce way, but Commerce will hire its branch managers and many employees away from other banks in the market and send them to its own training institution to learn its culture. Commerce rarely advertises on rates but instead focuses on the retailing ethos, with a retailer focus on things like no ATM fees and instant credit and debit card issuance when opening accounts.
Commerce is under scrutiny by federal regulators over real estate deals between it and businesses involving Hill, who was paid $3.6 million in salary and other compensation last year.
In addition, the four largest banks in south Florida deposit market share, Wachovia, Bank of America, Washington Mutual and SunTrust, together have nearly 800 branches in south Florida and can be expected to defend their shares. The competing banks for the most part declined to comment on Commerce’s arrival. An exception, Gene Schaefer, Bank of America’s president for Miami-Dade and Monroe counties, says Bank of America’s national franchise is “unparalleled” for customers and that the coming of Commerce is “a sign that Florida is a great place to do business, and we welcome the competition.”
Hill sees his model marching along as Commerce completes nine branch openings from Boca Raton to South Beach with a goal of 15 to 20 by year-end. The “hot money” at the acquired Palm Beach County Bank — deposits that chase the highest rates — ran off but has been replaced with lower cost deposits, he says. “We’re growing very nicely,” says Hill. “You’ll continue to see lots of these new buildings coming up.”