Pennsylvania's Commerce Reports OCC Realty Investigation

Pennsylvania Commerce Bancorp Inc. of Harrisburg, which has a longstanding relationship with Commerce Bancorp Inc. in Cherry Hill, N.J., appears to have inherited some of the $48.2 billion-asset company's regulatory problems.

Pennsylvania Commerce, a $1.9 billion-asset company, said in a regulatory filing Friday that the Office of the Comptroller of the Currency is conducting an investigation into real estate dealings, its officers and directors and companies they control, as well as "current and former officers and directors of Commerce Bank," the bank subsidiary of Commerce Bancorp.

The OCC's probe follows the ouster this summer of Vernon Hill, founder and long-time chairman and chief executive of Commerce Bancorp, after the OCC challenged insider party transactions at the company.

Commerce Bancorp was ordered to sever ties with InterArch Inc., a firm owned my Mr. Hill's wife Shirley that designs Commerce - and Pennsylvania Commerce - branches. Regulators also ordered Commerce Bancorp to resolve its relationship with real estate firms controlled by Mr. Hill's family that owned branches Commerce Bancorp operates.

Commerce Bancorp and Pennsylvania Commerce's relationship dates back to 1985 and the latter company's founding.

In effect Pennsylvania Commerce was a franchise of Commerce covering a 34-county territory in central and southern Pennsylvania. And Mr. Hill, who still operates a number of Burger King franchises and sought to recreate a retail-store experience in banking, had held a vice chair role at the Harrisburg company until 2002. The smaller bank's 32 branches, marketing, and website look virtually identical to those of Commerce Bancorp., which provides back-office support, including technology and computer network maintenance.

Commerce Bancorp owns 10.84% of Pennsylvania Commerce, though a spokesman for the smaller company stressed that it "is, and has always been, independent of Commerce Bancorp." He declined to comment beyond the SEC filing and the OCC declined to comment. The larger Commerce did not return calls.

"It is a unique relationship," said Joseph Fenech, an analyst with Sandler O'Neill & Partners LP.

Observers said it is unclear what exactly the OCC is looking into at Pennsylvania Commerce, but suggest that it may be examining whether Commerce Bancorp's problems spilled over to Pennsylvania Commerce.

"We thought that [Pennsylvania Commerce] was not ensnared in some of the issues of the 'larger Commerce,' but it appears that they are," said Mr. Fenech said.

Christopher Whalen, the managing director of Institutional Risk Analytics, said that given the two companies' close relationship and former management ties, it was only a matter of time until the trail of the OCC's investigation into Commerce Bancorp would lead them to Pennsylvania Commerce.

In its proxy statement published in May, Pennsylvania Commerce disclosed that its own chairman and CEO Gary L. Nalbandian is also the vice president and treasurer NAI/Commercial-Industrial Realty Co. That firm helps the bank "identify sites" for new branches, according to the proxy, and it received commissions "from independent third parties related to real estate transactions conducted on behalf of the bank." But the proxy said, "Mr. Nalbandian received no financial benefit from such commissions."

Further, Pennsylvania Commerce director Howell C. Mette owns a 10% stake in the law firm of Mette, Evans & Woodside, "which Commerce retained during 2006, and intends to retain during 2007," according to the proxy. Meanwhile, Pennsylvania Commerce has an existing written agreement with the OCC to improve its risk management, internal audit, consumer compliance, and bank secrecy compliance. The spokesman for the company would not provide an update of those issues Friday.

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