Commerce Faces Red Tape

A probe results in reviews that could slow branch openings.
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Regulators are asking

Commerce Bancorp

(CBH) - Get Report

for more information before giving it approval to build more branches.

The Office of the Comptroller of the Currency is asking for "enhanced" information for pending branch site applications, which is lengthening the approval time, according to Commerce's Chairman and CEO Vernon Hill. The bank says it doesn't expect any problems tied to the review, though investors might worry that the rising requirements could slow down the company's red hot expansion.

If so, those concerns weren't evident Wednesday. Shares of Commerce rose 59 cents to $34.37.

"It is true that we received no OCC approvals in the first quarter," Hill said on Commerce's earnings call on Wednesday. "We have no reason to believe that we won't get new approvals in the second quarter."

The additional requirement for Commerce comes on the heels of an investigation into the Cherry Hill, N.J., bank by the OCC and Board of Governors of the Federal Reserve System.

Commerce disclosed last quarter that federal regulators are probing certain "transactions with its officers, directors and related parties, including transactions involving bank premises," according to its fourth quarter earnings report.

Analysts say the probe covers possible conflicts of interest involving Commerce locations and Hill's personal investment properties.

According to Commerce's 2006 proxy, "rents paid under these agreements represent market rates, are supported by independent appraisals and approved by the independent members of the board."

Hill said Wednesday that the $47 billion-asset company is "evaluating" the "related-party transactions" being investigated.

"We're making no commitment to change anything right now, but it's something we're looking at," he said.

Commerce has been aggressively expanding its franchise over the past few years beyond its traditional footprint of New Jersey and Philly-area customers. The company -- which has not been known to do many bank acquisitions -- first made its way into Florida in 2005 when it bought Palm Beach County Bank. The company has said it plans to open 150 branches there by 2012.

It currently has 70 sites approved overall to become branches. It did not say how many more were still pending, but the bank plans to open nine to 10 branches this quarter and a total of 65 this year.

Last quarter it added nine branches, bringing its total branch count to 437.

Gerard Cassidy, an analyst at RBC Capital Markets who rates Commerce underperform, said that while it's unusual for Commerce to provide additional information on branch locations, it is part of the normal process when banks are under investigation.

"The OCC is being extra careful with this company because of the ongoing investigation they're conducting," he says. "Regulators want to make sure all the T's are crossed and I's are dotted."

Regulators could be asking Commerce to provide additional information about who is providing services to assist in opening the branches, about the costs of opening these branches and about how they will be managed, among other things, Cassidy says.

"The concern we would have is that an investigation is the most serious of actions by the regulators," he says. "If they get saddled with a cease-and-desist order, the stock is going to plummet. That could greatly restrict their ability to open branches."

But Cassidy says it's more likely Commerce could settle with regulators under a lesser offense, such as a "memorandum of understanding."

Commerce reported first quarter earnings on Wednesday. The company made $77.9 million, or 40 cents a share, compared with $77.3 million, or 41 cents a share, a year earlier. Revenue rose 12% from a year earlier but remained flat from the fourth quarter at $492 million.