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Commerce Bancorp Discloses Federal Probe, Warns on Profit

Commerce Bancorp , a fast-growing Northeast U.S. bank, said federal regulators have begun investigating transactions involving company officials.

The company, which operates mainly in New Jersey, New York and Pennsylvania, also said
profits in early 2007 should fall below analyst forecasts because a tough interest-rate environment is crimping lending margins.

Commerce also reported a 68% increase in fourth-quarter profit to $78.7 million, or 40 cents a share, from $46.9 million, or 26 cents. Profit matched the average analyst forecast, according to Reuters Estimates.

Commerce said the probe by the Federal Reserve and the Office of the Comptroller of the Currency "will include but not be limited to transactions with its officers, directors and related parties, including transactions involving bank premises."

On a conference call, Commerce said it is cooperating and formed a committee of independent directors on the matter.

Business Relationships

Commerce tightened internal controls after becoming enmeshed in a 2004 Philadelphia municipal corruption scandal.

The company has also in proxy filings been disclosing business relationships with entities in which Chief Executive Vernon Hill is a business partner, and with an architectural design firm run by Hill's wife.

"If regulators are now probing these relationships, they may simply be late to the party," said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. "The stock is down amid concern they may have found something else."

Commerce declined to discuss the substance of the probe. It did not immediately return a call for comment. Federal Reserve spokeswoman Deborah Lagomarsino declined to comment. An OCC representative was not immediately available for comment.

The company also said net interest margin, the difference between what it earns on loans and pays on deposits, fell to 3.25 percent from 3.27 percent in the third quarter.

Chief Financial Officer Douglas Pauls expects net interest margin to be between 3.2% and 3.3% in the first half of 2007.

Oulook on Earnings

He said it was "reasonable" that quarterly earnings will stay around 40 cents a share until the Fed begins cutting short-term rates.

Analysts on average had forecast profit per share of 41 cents for the first quarter and $1.84 for the year. Cassidy said it now appears "next to impossible" for Commerce to hit that full-year target.

Commerce opened 26 branches in the quarter, ending the year with 428. These include 247 in the New York City area, 155 in and around Philadelphia, 17 in the Washington, D.C. area and
nine in southeast Florida. Commerce expects to open about 65 branches in 2007.

"We see nothing on the horizon now that will impact our ability to meet our expansion plans in (2007)," Hill said.