surprise ouster of founder and CEO Vernon Hill has investors speculating about the fate of the deposit-rich bank and the possibility that it will now be acquired.
The news of Hill's departure sent shares rocketing as much as 9% Friday.
Hill, who founded the Cherry Hill, N.J.-based bank 34 years ago, is the mastermind behind Commerce's highly successful deposit-gathering strategy. The company, which has nearly $50 billion in assets and $44 billion in deposits, is known for its extended weekday and weekend hours, a focus on customer service, inviting branch designs and multiple gimmicks to lure in customers.
But while the company's business model has been praised by analysts for years, Commerce has been in foul territory with regulators recently.
The company revealed in January that it was under investigation by regulators because of insider-related party transactions between Hill and others. The scrutiny was tied in part to Commerce's real estate transactions, including the fact that the bank had used an architectural firm owned by Hill's wife to design branch offices.
Hill's departure comes as the company agreed to a consent order with the Office of the Comptroller of the Currency and entered into a memorandum of understanding with the Federal Reserve Bank of Philadelphia that will help resolve the matter.
Under the consent order, which Commerce
hinted at two weeks ago, the company's board and new leadership team "will initiate governance changes and have committed themselves to improve relationships and work more closely with regulators in the future," Commerce said.
Shares of Commerce were trading up $2.90 to $36.71 Friday, on more than five times their average daily trading volume.
Investors believe that since Commerce's father figure is leaving the company, the likelihood is high that the red-hot banking M&A environment will lead to a company takeover.
"There is now speculation that the company will be sold," says Gerard Cassidy, an analyst at RBC Capital Markets, a unit of Royal Bank of Canada. "To have the cease-and-desist order and within two weeks a chairman and CEO pushed out is a surprise."
Short-sellers also may be rushing to cover their positions, says Joseph Capone, a hedge fund manager who does not own Commerce shares.
"The shorts have largely lost their catalyst and they need to cover," says Capone, who is a contributor to
investing ideas Web site.
"Their catalyst is a combination of a potential short-term to long-term slowdown in the pace of new store openings, an overhang created by Vernon Hill and his wife's firm," he adds. "With the resolution of these issues with the Fed Reserve and OCC and with Vernon Hill out -- now it's just a valuation short."
But the sale talk remained in focus. On a conference call, new Chairman Dennis DiFlorio said, "Our plan is to say the course with what's working so well for us, and that's de novo expansion." He added, however, that Commerce would "review any possibility that would make good strategic sense for the company."
Analysts are divided on just how soon a deal could come.
Cassidy says that Commerce will need to gets its ducks in line with regard to the orders issued by the regulators before it can consider a sale.
Any potential acquirer would likely frown on buying a company that still had to work through regulatory problems, he says, though he believes a sale will come once the issues are resolved. Working through regulatory matters typically takes anywhere from 12 to 18 months.
If Commerce went on the block now, "they would be selling from a position of weakness," he says. "
The interesting part of this transaction is what is the company worth to the buyer? Because whoever buys it is going to ruin the culture of this company, so there has to be some sort of execution discount for the company."
But Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners, says a company sale could spur regulators to more quickly resolve Commerce's issues.
Any number of buyers could be eager to get their hands on Commerce's attractive franchise throughout the mid-Atlantic states and Florida.
Bank of America
, even smaller banks such as
( SOV) could pony up to get a hold of Commerce's more than 400 branches.
While Commerce has an attractive franchise and a relatively simple and direct business model toward customers, its earnings and shares have been hurt over the last few years as a flat yield curve placed pressure on interest income.
"The stock has done poorly for a few reasons," Capone says. "First the overall banking environment has been difficult. The pace of new store openings has slowed. Third, their deposit growth has slowed and several quarters of missing EPS performance -- the stock has had a few tough years."
But observers say Commerce's franchise will become more valuable as the yield curve steepens.
Commerce didn't name a direct replacement for Hill, instead creating a new "Office of the Chairman" consisting of DiFlorio as chairman of Commerce Bank, Robert Falese as president and CEO of the banking operation and Doug Pauls as chief financial officer.