The remarkable departure of Vernon Hill

NEW YORK (Fortune) -- The forced departure of Commerce Bancorp CEO Vernon Hill II is one of the most remarkable executive decapitations ever.

Hill, 61, who founded New Jersey-based Commerce in 1973 and turned it into a powerful regional bank with first-rate customer service and creative marketing, was ejected Friday by regulators irate about the bank's business dealings with Hill and his family.

Ousted CEO of Commerce Bancorp Vernon Hill II

More from Fortune

Floating city nears maiden voyage Stop the 'jobless recovery' madness! Playing through with one of golf's top execs

FORTUNE 500 Current Issue Subscribe to Fortune

From virtually nothing, Commerce rose to 2006 profits of just under $300 million. The company's last proxy statement shows Hill and family owning 3.21% - now worth about $228 million - of the company's stock.

But the proxy also spells out - though not in as much detail as you'd like - the business arrangements between various Hills and the company that appear to have driven bank regulators up the wall.

Hill himself has interests in partnerships and trusts that lease land and bank premises to Commerce. A son and brother of Hill's are also in partnerships that lease land to the company. The two - or maybe this is another son and brother; you can't be sure - perform commercial real estate services for Commerce as well.

Most notably, Hill's wife, Shirley, for years has owned a company that supplies architectural design and facilities management services to Commerce. Her bill in 2006, leaving aside earlier big-dollar years, was $9.2 million.

Then there's one last fact about Vernon Hill himself: He is a "principal owner" (and a couple of Commerce directors are also owners) of a New Jersey golf course, Galloway National, that Commerce has used for "business development," meaning no doubt that bank officers have taken customers there to play golf. Commerce paid Galloway $643,000 in 2006.

Some bank analysts, believing that Commerce has negotiated transaction prices with the Hill family that are fair, have always thought these so-called "related party" arrangements were okay. Shirley Hill's design work, which has produced modern, uncluttered Commerce branches, is also widely admired.

Says one veteran bank analyst: "I do not see the Hills as anything but honest, successful business people. Shirley Hill and her firm have deserved everything she's been paid. In my opinion, this is a classic case of good person battles regulators. And the regulators always win."

On the other hand, a big investor in Commerce stock says that many people like himself have urged Hill over the years to kill the related-party arrangements, which they saw as potential trouble. But Hill, the investor says, was "tone-deaf" about these conflicts-and now it's too late.

Oddly, Commerce Bancorp (Charts) stock jumped Friday, the day Hill's ouster was announced. The probable explanation? A belief by investors that with Hill gone, the company will become a hot acquisition target.