The indictment of two Commerce Bancorp ( CBH) officials in a Philadelphia corruption scandal this week is an extreme -- but not unpredictable -- consequence of the hard-charging bank's penchant for packing its board with political insiders.

Investor confidence has been rocked this week by allegations that two executives of Commerce's Pennsylvania subsidiary bank were part of a criminal conspiracy to arrange special loans for a former Philadelphia official who awarded bond underwriting. The stock is down 16% since the indictment became public.

The flight from Commerce's shares, which began trading Friday at $54.22, stands in contrast to the muted reaction of investors to similar allegations facing two former J.P. Morgan Chase ( JPM) bankers.

Commerce, in a statement issued shortly after the indictment was announced, said "neither it nor any of its subsidiaries or other officers and employees are targets of the investigation." In a written response to questions about both the bank's political connections and an informal investigation by the SEC into its political contributions, a Commerce spokesman said the company is "aware of no inquiry."

Even if the Philadelphia criminal investigation leads to no additional charges, some fear it will embolden regulators to take a closer look at Commerce's history of packing its board, and those of its subsidiaries, with political powerbrokers. Critics contend that Commerce Chief Executive Vernon Hill has leveraged those connections to win lucrative municipal financial services agreements for the bank.

State and local government luminaries sitting on the boards of Commerce and five banking subsidiaries include former New Jersey Acting Gov. Donald DiFranceso; New Jersey Sports and Exposition Authority Chairman Joseph Buckelew; top Democratic fundraiser George Norcross; Hackensack, N.J., Economic Development Vice Chairman James Napolitano; and high-powered criminal defense lawyer Michael Critchley. Lawyers in Critchley's office have represented some of the Commerce employees who were called to testify before the federal grand jury in the Philadelphia corruption probe.

A major part of the indictment alleges that Philadelphia lawyer Ronald White, a director of Commerce's Pennsylvania banking subsidiary, used his influence over former Philadelphia City Treasurer Corey Kemp to secure municipal bond work and other financial services agreements for Commerce. White, according to the indictment, received a monthly retainer or consulting fee from Commerce, starting in 2000. The fees, which began at $10,000 a month, eventually totaled $182,000.

If nothing else, the 150-page federal indictment is solid fodder for critics who have long suspected the bank of political game-playing.

"Before this indictment came out, there was nothing solid. There were these rumors and allegations out there. If you were on the bull side, it was pretty easy to give management the benefit of the doubt," says Adam Barkstrom, a Legg Mason Wood Walker financial services analyst, who has been bearish on Commerce's stock. "But now you have this 150-page indictment, and that's changed the argument. There were some shenanigans going on," at least allegedly.

The indictment could force the SEC to step up its informal inquiry into allegations that Commerce used campaign donations to gain influence with local politicians in New Jersey and Pennsylvania.

In April 2003, Commerce announced it was suspending its practice of contributing money to New Jersey local and state politicians, after the SEC began looking into the matter. The SEC opened its inquiry after a series of media reports detailing the more than $2.4 million in campaign donations Commerce spread around from 1999 to 2003.

During that time, the bank's Commerce Capital Markets division became a major player in the New Jersey municipal bond market. But since it put a halt to political contributions, Commerce has lost some of its clout in the municipal bond market.

In 2002, Commerce ranked second in New Jersey in municipal bond underwriting, arranging $1.96 billion in local bonds, according to Thomson Financial. Last year, after halting political donations, the bank dropped to fifth place with $1.6 billion in bond work.

Commerce is continuing to fall in the ranking this year. To date, it stands in sixth place with $414 million in bond deals. The Cherry Hill, N.J.-based bank ranks behind Wall Street heavyweights Goldman Sachs ( GS), UBS ( UBS), Bear Stearns ( BSC), Citigroup ( C) and Lehman Brothers ( LEH).

The Commerce spokesman said in a statement that "rankings in terms of dollar volume vary according to deal flow."

Legg Mason's Barkstrom says the indictment could further erode Commerce's bond work, if municipalities become wary of doing business with the bank while a cloud of scandal hovers over it.

Analysts estimate that fees from municipal bond underwriting account for about 1% of the bank's revenue, small change for a bank with a little over $1 billion in revenue last year. But there's more at stake than bond underwriting. Analysts also estimate that as much as 18% of Commerce's deposit base comes from money stashed away by municipalities.

Commerce's fast-paced growth has been fueled by its ability to take in new deposits at a rapid clip and use those assets to make loans and high-returning investments.

If the scandal causes municipalities to take their banking business elsewhere, it could put a crimp into Commerce's growth story. Gerard Cassidy, a RBC Capital markets bank analyst, says municipal governments may account for as much as 15% of the bank's total net interest revenue.

"There is the possibility that this could lead other municipalities to review their relationship with Commerce, a case of 'guilt by association,'" says Cassidy in a research note.