Chief resigns and Commerce Bank agrees to end trade deals with his family

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At investor meetings just two weeks ago, Vernon W. Hill II seemed optimistic about the prospects for Commerce Bancorp, the company he founded almost 35 years ago, as well as his own.

Mr. Hill and the bank had undergone months of regulatory review in their business dealings with family members and other company insiders. He was humiliated, according to someone who met him at the time, despite being determined to reach a settlement and lead the bank’s rebound.

But last Tuesday, Mr. Hill looked stunned when the board demanded his resignation.

“Vernon had expected this to explode,” said another person with first-hand knowledge of the situation. “It wasn’t a summer storm with lightning. It was a hurricane of four or five forces.

Commerce publicly announced yesterday that Mr. Hill, 61, is stepping down immediately as president and CEO. He also said he had entered into separate agreements with the Office of the Comptroller of the Currency and the Philadelphia Federal Reserve banning all business transactions with related parties and imposing several governance reforms.

The company has appointed three longtime executives to a new role as chairman. The agreements may also require the company to add three independent directors to its board of directors.

The upheaval came just five months after Commerce said federal regulators were investigating Mr. Hill’s business relationship and shocked many on Wall Street who thought he would never be forced to leave. Shares in the trade climbed 9.4% yesterday, to $ 36.99, with investors betting Mr. Hill’s departure would make the company a prime takeover bait.

“I have no doubt that if they suspended listing for the sale, you would have a line of buyers at the bottom of the block,” said Mark T. Fitzgibbon, analyst at Sandler O’Neill & Partners. He said major national banks, regional players and private equity firms were all on the prowl.

But on a conference call yesterday morning, Commerce executives suggested there were no immediate plans to sell. They said the bank would continue to build branches. And with rising interest rates, analysts have said they have an opportunity to be patient. The bank’s profitability is expected to improve, suggesting that its market value will increase.

“The plan here is to stay the course; it’s not a business that’s out of gas, ”said Dennis DiFlorio, new president of Commerce. Still, he left the door open for potential suitors. “We will look at anything that makes strategic sense for the business. “

Mr. Hill’s next move is also unclear. By leaving Commerce next month, he could be entitled to severance pay of up to $ 17.3 million, although he and the board are still negotiating the terms. He also owns over 6.1 million Commerce shares, valued at over $ 225.6 million. His colleagues say his entrepreneurial streak is so brilliant that it is conceivable that he could start another business.

Credit…Brendan McDermid / Reuters

Neither Mr. Hill nor the lawyer representing him could be reached yesterday for comment.

Analysts say Mr. Hill’s departure marked the sudden and sad end of a remarkable career.

“He brought to retail banking what Starbucks brought to coffee,” said Meredith A. Whitney, analyst at CIBC in New York.

A former real estate developer, Mr. Hill founded Commerce in 1973 when he opened his first branch in southern New Jersey. But over the next three decades, he made it the fastest growing retail bank in the country by flouting the industry convention. Today, Commerce, based in Cherry Hill, NJ, has more than 450 branches from New York to Washington.

With a “Burger King Approach” that standardized the look of Commerce branches, Mr. Hill brought a retail mindset to the bank that didn’t exist before. He focused on collecting deposits rather than granting loans and improving the customer experience rather than offering better interest rates. While rival banks defended the arrival of the cash machine, it opened up friendly and spacious branches and kept them open seven days a week.

“We believe this is a retail business and we want to attract as many customers as possible to our stores,” Mr. Hill said in an interview last year. “My competitors see the customers in the stores as a cost, so they do things to chase them away. “

He was also a maverick in its business dealings, making Commerce look like a piggy bank to insiders instead of a state-owned enterprise.

While Mr. Hill survived previous government investigations, federal regulators began reviewing these transactions late last year.

Critics have long complained about the bank’s commercial ties with companies owned or controlled by Mr Hill and his wife, Shirley. Most have been regularly disclosed in public documents, making him an unlikely target for criminal prosecutors but ripe for regulatory action. Yesterday’s agreements did not end federal investigations, according to a person briefed on the matter.

For years Commerce leased land for bank branches to businesses owned by Mr. Hill and his family trusts; the businesses earned about $ 1.9 million in annual rent in 2005. Commerce also had deals with businesses run by family members.

InterArch, a company owned by Shirley Hill, has received more than $ 50 million over the past 10 years to design and decorate the bank’s branches. Interstate Commercial Real Estate, where Mr. Hill’s brother and son are executives, has earned over $ 1 million in commissions on trade-related transactions. And the bank has spent hundreds of thousands of dollars over the years at Galloway National Golf Club, an 18-hole course near Atlantic City owned by Mr. Hill.

Under pressure from regulators, Commerce agreed to end these practices this month. But as talks intensified over the past two weeks, the board concluded that Mr. Hill’s departure was necessary for the government to reach a final deal, according to another person briefed on the negotiations. Commerce’s growth strategy depends on opening branches to fuel depots, but regulators were reluctant to approve new offices until they reached a deal.


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