Commerce Bancorp Inc., best known for its consumer-oriented business model, has spent the last few years building its commercial lending operations. While relatively small, the business has grown quickly - more than 20% a year.
But, by design, this growth has been slower and subordinate to Commerce's first priority: deposit growth.
The Cherry Hill, N.J., company has hired 72 lenders and nine credit officers in the past two years. Recent changes to senior management emphasize risk management.
But commercial lending growth has tended to follow branch expansion. Commerce executives say they are not shifting strategies so much as solidifying ties with commercial deposit customers.
"Lending supports the overall goal to build relationships, and therefore core deposits. No deposit, no loan," said Robert D. Falese, the head of commercial and investment banking, in an recent interview.
Commerce, whose rapidly growing balance sheet reached $30 billion this quarter, lends mostly to small and midsize companies. Of its 117,000 small-business deposit customers, however, only 7,000 are also loan customers.
"That is a good business to grow, because we already know who these people are," Mr. Falese said.
A number of Commerce's lending segments have been built though hiring management groups from competitors, including two of its more important lending businesses: health care and commercial real estate. "We bring the expertise in, then we figure out who it is we want to do business with," Mr. Falese said.
Like others, Commerce has poached talent from big banks in the region. In 2002 it hired Gregory B. Braca from the former FleetBoston Financial Corp. as its senior lending officer for the New York market, in which Commerce had begun opening branches the year before. And in early 2003 it hired away John F. Cullinan from Fleet to be its head of its middle-market lending; he brought two lenders with him.
Commerce is close to hiring a group of commercial lending officers from a competitor in Washington, a market it will formally enter next year when it opens retail branches there. The company has grown by building branches, but also "by attracting experienced lending officers," Mr. Falese said.
Last month the company hired David M. Schlesinger to head its interest rate risk and corporate treasury management, as well as its retail deposit pricing. This month it hired James L. Gertie as chief risk officer.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said it is difficult to gauge Commerce's success in commercial lending because it is eclipsed by deposit growth. Commerce's deposits rose 34% in the third quarter, to $26.2 billion, dwarfing the $8.9 billion loan book. Chairman and chief executive Vernon W. Hill 2d keeps telling investors at conferences that "nobody can grow loans safely as fast as we grow deposits."
Loans grew 23.3% in 2000, 24.3% in 2001, 26% in 2002, and 27.6% last year, according to its filings with the Securities and Exchange Commission.
In its midquarter SEC update, Commerce said commercial loan growth as of Nov. 30 was 29% compared with a year earlier; at the end of the third quarter it was 31%.
Loans including commercial real estate rose 28.9% in 2003. In this year's third quarter those loans rose 31.8%, to $5.8 billion, and Mr. Falese said he expects "more of the same" in 2005.
Loan demand from small and midsize companies, which has been robust over all, may slow somewhat because these customers have enough cash flow on hand. Nonetheless, "the environment should be decent for commercial lending," Mr. Falese said.
So far growth has come without big credit problems at Commerce. In the third quarter nonperforming assets were 0.14% of total assets, and the chargeoff ratio stood at 0.18%. Commerce's low loan-to-deposit ratio "keeps loan losses down," Mr. Cassidy noted.
"To date," Mr. Falese said, "we've been able to make our numbers without trying to balloon our balance sheet with more risk assets, just for the sake of putting more loans on the book. There is not necessarily a strategy that says we have to work faster and harder just to keep up with core deposit growth."
Even analysts critical of Commerce say they are comfortable with its lending business. Thomas J. Monaco of Moors & Cabot Inc., who initiated coverage for Commerce on Dec. 10 with a "sell" rating, said in an interview last week that it "understands how to keep pristine credit quality."
Stepped-up competition, particularly from Bank of America Corp., could hurt Commerce's margins, Mr. Monaco said. B of A is seen as a stronger foe than the former Fleet, which B of A acquired in April. J.P. Morgan Chase & Co., long dominant in middle-market lending in the New York region, has potentially renewed vigor after its July acquisition of Bank One Corp.
Jacqueline Reeves, an analyst with BankAtlantic Bancorp's Ryan Beck & Co., said Commerce "is more tempered" about lending expansion than, for example, North Fork Bancorp of Melville, N.Y., which has been hiring big groups of commercial lenders away from Fleet this year. "I would be surprised" if Commerce suddenly changed its balance sheet to stress loan growth, Ms. Reeves said.
"We don't have to change the strategy," Mr. Falese said. "We just have to move to other communities. We don't have to change the credit culture, and we don't have to change the way we go about soliciting business.
"Sometimes the best deal you make with your customer is to say no. It keeps them out of a problem. I want my lending officers to say no."
