Hill forced out at Commerce

The king has been ousted. And now the kingdom may be for sale.

In a stunning move linked to a federal investigation of insider dealings, Vernon W. Hill II is out at Commerce Bancorp Inc., which he founded in 1973 and built into a $47 billion bank that shook up the lethargic world of retail banking.

The Cherry Hill bank said yesterday that Hill, 61, left its main operating subsidiary and would retire as chairman, president and chief executive officer of Commerce Bancorp on July 31.

Commerce shares gained $3.18, or 9.4 percent, to $36.99 yesterday on the New York Stock Exchange as investors placed bets that the company would be sold.

In a phone interview, Hill said he was the largest shareholder at Commerce Bank and opposed selling the company. "I don't think there is any reason why the team can't keep the model or the business together," he said.

Hill's fans praised the former Burger King franchisee as having revolutionized retail banking with his commitment to killing what he called "stupid rules," such as bankers' hours and stinginess with pens.

Hill decided more than a decade ago to open Commerce branches seven days a week and give away millions of pens a year.

"The regulators in their wisdom have decided to take out one of the great entrepreneurs of American banking in the last century," said Gary B. Townsend, a banking analyst with Friedman, Billings, Ramsey & Co. Inc.

But critics of Hill said that he ran Commerce as if it were a wholly owned private business and that it was just a matter of time before regulators caught up with him, especially in the post-Enron era.

Commerce has disclosed for years in its annual proxy statements that it leases land for some of its 437 branches from a real estate firm partly owned by Hill and uses an architectural design firm owned by his wife, Shirley.

From 1996 through 2006, Commerce made $12.74 million in lease and other payments to real estate firms affiliated with Hill or family members and $59.23 million to Shirley Hill's InterArch Inc., of Mount Laurel.

Banking observers said Commerce's growth into a $47 billion bank led investors and regulators to intensify their focus on the long-known insider dealings.

"When you get to be that large, and you have that many related-party transactions, it tends to get people's attention," said W. Kirk Wycoff, a veteran Philadelphia banker.

Commerce said in January that the federal Office of the Comptroller of Currency and the Federal Reserve were looking into insider dealings involving bank sites.

The comptroller's investigation was not related to one by the FBI that led to the conviction of two Commerce Bank executives in 2005 as part of the City Hall corruption probe. Nor was it related to another FBI investigation of Commerce Bank's efforts in Pennsylvania, which the U.S. attorney concluded without bringing any criminal allegations.

Federal authorities involved in the corruption case did not participate in the comptroller's investigation and did not learn of the consent decree and Hill's resignation until it became public yesterday morning.

Douglas J. Pauls, Commerce's executive vice president and chief financial officer, said during a conference call with Wall Street analysts yesterday that "these related-party transactions have become a distraction to our regulators, shareholders, customers and employees."

Pauls, 49, is one of three members of a new office of the chairman at Commerce Bank N.A., which is the operating subsidiary of Commerce Bancorp. That group also includes Dennis M. DiFlorio, 53, who was promoted to chairman, and Robert D. Falese Jr., 60, who was promoted to president and chief executive.

Falese is expected to become chief executive of Commerce Bancorp, with a board member taking over as chairman.

Commerce Bank N.A. said it had signed a consent order with the Office of the Comptroller of the Currency, while Commerce Bancorp has entered into a memorandum of understanding with the Federal Reserve Bank of Philadelphia.

The overarching goal of these agreements is to end insider real estate and other transactions. The bank has until the end of the year to end contracts with Shirley Hill's InterArch and with Interstate Commercial Real Estate Inc., which employs Vernon Hill's brother, Robert Hill, and son, Vernon W. Hill 3d.

Commerce said previously that it planned to make InterArch part of Commerce.

The agreements require the board to form a real estate review committee. The bank has not yet decided whether that committee will review existing leases between Vernon Hill's real estate company or whether the bank will hire an outside party to do it.

Like many charismatic founders, Hill - whose potential severance could range from $11.3 million to $17.3 million - is deeply entwined with the identity of Commerce. His stake of 6.1 million shares is worth $225.6 million.

"No one thinks of Commerce without thinking of Vernon in the same breath. He's so linked to that company," said James Smart, chief executive of Smart Business Advisory & Consulting L.L.C. in Devon.

Shirley Hill met Hill in the early 1970s when she worked in site development for Burger King in South Jersey. She not only has designed the branches, she also makes regular visits - accompanied by the couple's pet Yorkshire terrier - to ensure that meticulous standards are met, such as whether flat-screen televisions are displayed at precisely the right height.

However, Commerce's attention to detail in its branches failed to overcome changes in the interest-rate environment in recent years that contributed significantly to a decline in operating profit margin to 16 percent last year from 26 percent in 2004.

On top of that, federal regulators have not approved any new branch openings this year for the bank, crippling a company whose core strategy is to aggressively open branches.

Commerce executives, who tried yesterday to draw attention to the bank's strength, said they would meet with regulators Monday or Tuesday about the information they need to provide to get those approvals.

"The fundamentals of our company have never been stronger and are fully intact," DiFlorio said. "Bob Falese and I, along with Doug and so many others, have stood shoulder to shoulder and built this place. We are the ones that have essentially wired this place, and we are well-positioned to take this company forward."

For background, SEC filings

and more on Commerce Bank and Vernon W. Hill II, go to http://go.philly.com/CommerceEndText