Boardroom Battle

The following feature appeared in the second quarter 2023 edition of Bank Director magazine. It and other stories are available to magazine subscribers and members of Bank Director’s Bank Services Membership Program. Learn more about subscribing here.

Few banks can tout a success story as enviable as Cherry Hill, New Jersey-based Commerce Bancorp.

Anyone who invested in Commerce back in 1973, when Vernon Hill II founded the bank, saw their investment grow 470 times by 2007, when the bank sold to TD Bank Financial Group, he says. “The 34-year annual return to our shareholders was 23% a year. … If you look at the growth numbers of Commerce, there was nobody even close to it.” The bank went from a single location with just nine employees to almost $50 billion in assets, more than 12,000 employees and 470 branches – or stores, as Hill calls them.

It accomplished this by focusing on growth, at a rate of $18 million in deposits annually, according to Hill. A “Philadelphia” magazine article from 2006, titled “Vernon the Barbarian,” described Hill rallying his troops – the thousands of bank employees attending the company’s “Wow” awards, which gave out honors such as “Best Teller.” With employees cheering him on, he told the crowd, “Most of you know that each year, we go and save another part of America that’s not served by Commerce.” A Lehman Brothers analyst covering the bank at the time likened its expansion to “the Mongolian horde coming across the plains, threatening the Roman Empire.”

Commerce won so many customer accounts because it focused on taking a retail approach to banking, offering a high level of service. Billed as “America’s Most Convenient Bank,” Commerce branches were open seven days a week. They welcomed dogs in branches and gave out dog biscuits. And Hill isn’t a cost-cutter – he likes his branches to be well designed, in the best locations and stocked with free pens that advertise the bank. Hill boasts that Commerce gave away 28 million pens a month to anyone who came in the branch.

But the years since have been fraught with trouble. Described as the “greatest retail banker of our lifetime,” Hill has been embroiled in lawsuits, a boardroom battle, regulatory actions and activist campaigns. Hill hasn’t been able to create the same magic since, and shareholders have suffered.

In 2007, Hill lost his job at Commerce under pressure from the Office of the Comptroller of the Currency, according to a Securities and Exchange Commission filing. Hill had used a real estate firm he owned with family members to scout locations for Commerce branches; his wife’s design firm, InterArch, was contracted for the company’s design and branding. The OCC placed restrictions on related-party transactions that would have prolonged the branch application process.

Months later, TD announced that it would acquire Commerce in an $8.5 billion transaction. The deal was an important step in the Canadian bank’s own growth in the U.S., doubling its U.S. footprint. TD kept the “America’s Most Convenient Bank” slogan, which it uses to this day.

As an investor with more than 6 million Commerce shares, Hill had done well for himself. But after more than three decades running a bank, he suddenly had nothing to do. “I couldn’t work for somebody else,” he tells me. So in 2008, Hill invested in sleepy little Republic First Bancorp, a small competitor to Commerce that at the time had less than $1 billion in assets and a handful of branches primarily centered around its headquarters in Philadelphia. He began acting as an advisor to the bank’s leaders, including then-CEO and founder Harry Madonna. Then two years later, in 2010, he crossed the pond to found Metro Bank in the U.K., leveraging the same model that made Commerce a success.

At Metro Bank, the stock saw steady growth from its 2016 IPO before going into a free fall in the latter half of 2018; it hasn’t recovered. Republic’s stock has also been beleaguered. Back in the Commerce days, Hill’s customer-friendly, growth-focused approach was revolutionary. His friend, longtime bank investor Tom Brown, is the one who describes him as the “greatest retail banker of our lifetime.” But even he admits Hill can have a difficult personality.

David Slackman, a former Commerce executive, believes Hill is often misunderstood. “Vernon is extremely confident in the model and extremely confident in his ability to be successful with it, and can therefore sometimes come across as seeming inflexible,” he says. He describes Hill as an exact but supportive and loyal boss who ended conversations with his top officers by saying, “Don’t do anything stupid.” That was a warning not to stray away from the Commerce model, Slackman recalls.

“My personality is strong,” Hill says. Commerce was frequently compared to Apple back in the day, which was run by another passionate business leader, Steve Jobs. It’s clear – from talking to Hill, reading his books and digging into his banks – that he’s committed to his approach to banking.

But relationships devolved at Republic over the years. Madonna says Hill – who eventually became CEO before resigning 18 months later – held his bank hostage due to a perfect split in the boardroom: three directors backing Hill, and four backing Madonna. Madonna says Hill operated without effective board oversight due to the division in the boardroom.

But in a lawsuit filed against Republic and Madonna’s faction of directors, Hill and former director Barry Spevak contend that it was Madonna’s group that had the board deadlocked, with Hill’s directors “intentionally and systematically prevented” from participating in board deliberations.

Back before that became an issue, in 2008, Republic needed capital, and it needed a new direction. Like many banks in the financial crisis, Republic had experienced losses in its loan portfolio, says Frank Schiraldi, a managing director and senior research analyst at Piper Sandler & Co. “Vernon came along as really a savior,” he explains. Hill says he invested $6 million. “With [Hill] now being a large owner, he had the opportunity to push his old Commerce strategy as sort of a reboot. And initially, it was very well received.” Madonna describes Republic in those days as a “garden-variety community bank.” He says Hill persuaded him to turn Republic into a “deposit-driven organization” with an expanded branch footprint. Hill’s ownership gained him the right to designate a board member, Theodore Flocco Jr. – a former senior audit partner at Ernst & Young who had advised Commerce, and someone Hill considered a friend.

“When I invested in Republic, they were a broken bank, troubled. They needed capital, they needed [our] model, they needed people,” says Hill. “I came in and invested on the terms that I would install – with their approval – what we call ‘The Power of Red.’” Hill’s branding campaign eventually included a big red ‘R’ for Republic; Commerce had a similar big red ‘C.’

“It was an opportunity for me to invest and use the Commerce model to expand Republic and serve the same markets we had served at Commerce,” he says. But, “it’s harder to convert something than it is to build it from scratch.”

Meanwhile, Madonna was still running Republic while Hill was in London recreating the old Commerce model from the ground up at Metro Bank. And he was doing that with Shirley Hill, his wife and “branding queen” who owned the firm InterArch, responsible for branding, marketing and design at Hill’s banks – Commerce, Republic and Metro.

Hill describes his wife’s involvement as a whole package adding value, similar to the way Apple designs its products and experience. “She does architecture, construction, marketing and branding. And the value of that is not one branch. It’s all united together,” explains Hill. Metro paid InterArch over u00a320 million over the five-year period preceding the Hills’ departure in 2019, according to the bank’s annual reports.

“Everybody knows we have to get third-party reviews on the pricing,” Hill says of the InterArch relationship, something that occurred at both banks.

Hill stresses that InterArch was worth every penny and just as important to his banking model as his dog, Sir Duffield II, or Duffy – a Yorkshire terrier who has featured heavily in promotions for Republic and Metro. “My dog’s more well known than me,” Hill jokes. At Metro, Duffy joined the Hills in welcoming customers – and their dogs – at the bank’s grand openings. A Duffy float made its way through London parades. The Yorkie even had a column in the bank’s newsletter, and a Twitter account featuring him visiting bank branches and dining with Ann Coulter. “Everybody knows Duffy; he goes everywhere,” says Hill. The dog-friendly branches also appealed to customers, he says. “The customers take that to mean, ‘If you love my dog, you must love me.’”

It was the original Sir Duffield, visiting a competing bank’s branch with Shirley Hill in 2001, who inspired Vernon Hill’s dog-friendly approach. She was stopped at the front door and told that her pup wasn’t allowed. Hill decided being open to dogs was another way to disrupt banking and set his banks apart.

Despite the known issues around related-party transactions, Republic offered Hill the chair role in 2016, ramping up his involvement with the bank. “We were very aware of his relationship,” says Madonna. “Consultants were brought in to look at the contracts, to make sure they were fair market value, and that things were done in accordance with laws and regulations, and that they were in the best interest of the bank.” InterArch billed Republic $2.2 million for marketing, design and similar services from 2019 through 2021, according to an SEC filing.

Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, sees a huge conflict for any public company doing business with a spouse or family member of a CEO or director – even if all parties appear satisfied with the arrangement. “You’re going to face all kinds of accusations of unfair dealing,” he says. “I can’t imagine a board being counseled that it was OK to do that. That’s strange.”

But while Hill was chairman, he was still spending most of his time in Europe building Metro Bank, according to Madonna. That changed in 2019, with Hill’s resignation from the U.K. bank after Metro disclosed that it had misclassified commercial loans, leading to a £900 million increase in risk-weighted assets. Put simply, Metro classified those loans as less risky than regulators thought they were; riskier loans require more capital.

Metro Bank shares dropped precipitously when the bank disclosed the issues in January and continued to fall through the year. The stock peaked at more than £40 in March 2018; it was valued at less than £1.50 as of Feb. 28, 2023, on the heels of Brexit and the Covid-19 pandemic. Shareholders began calling for Hill’s resignation; he stepped down as Metro’s chairman in October 2019, and resigned from the board by the end of the year – along with Metro CEO Craig Donaldson, who’d run the bank by Hill’s side since its founding in 2010. “It was a misinterpretation of the rules,” Donaldson told Bloomberg at the time, calling it an “isolated incident” that the bank was seeking to rectify.

Issues with the bank’s regulators took years to resolve, and included a £5.4 million penalty to the Prudential Regulation Authority and a £10 million fine to the Financial Conduct Authority.

“What happened in London really didn’t involve me,” Hill says. “Their capital system [in the U.K.] is way different than ours; there was nothing about our model.”

Following his departure from Metro, Hill became increasingly involved in day-to-day operations and decision-making at Republic. “He really was trying even harder to prove that what he was doing [at] Metro Bank was right and not wrong, and he doubled down on pushing for more and more deposits that we couldn’t put to use,” Madonna says. “That’s when it turned hostile.”

The Paycheck Protection Program – in many ways a boon to community banks in 2020 – revealed divides in the Republic boardroom. Madonna says he and some of the other directors wanted to use the influx in deposits from PPP loan customers to return expensive government funding, reducing the bank’s costs and improving its loan-to-deposit ratio. “Instead, [Hill] went out and purchased a lot of long-term, mortgage-backed securities” at low interest rates, Madonna says. Loans were already a low percentage of the bank’s assets compared to peer institutions, due to Hill’s preference to leverage securities.

Much like institutions with long-term, low rate bonds and securities on the books, Republic First was negatively affected when the Federal Reserve began its series of inflation-fighting interest rate increases in early 2022. Republic’s accumulated other comprehensive income, influenced by bond prices, amounted to a negative $148 million as of Dec. 31, 2022, according to S&P Global Market Intelligence; securities accounted for 43% of the bank’s assets.

“When you have a lot of low-cost deposits, you look at ways to invest it. Sometimes you make loans; sometimes you buy bonds,” says Hill. The bank couldn’t safely grow loans as fast as it could grow deposits; he favored government mortgage-backed securities as an alternative to loan generation. “When you have excess funding, what do you do with it? In the current environment, buying government mortgage-backed securities is the best way,” Hill says.

The AOCI effects plaguing many banks are more pronounced at Republic due to its model, says Schiraldi.
Beyond the bank’s securities portfolio, Hill wanted to build expensive, $7 million branches, according to Madonna – significantly more expensive than the average branch cost of $1.8 million, per a 2019 survey by the consulting firm Bancography.

But Hill has a different view. “The retailers that win in life are the ones that have the highest sales per store,” Hill says, adding that deposits per branch at Republic were “extremely high.” Deposits were growing, he adds, by around $30 million a year per branch. In its 2021 annual report, Republic reported deposit growth over the prior three years at an average 30% annually.

But profitability metrics had been abysmally low for years and didn’t appear to be improving. In Bank Director’s annual performance rankings dating back to 2015 – the year before Hill became chairman – Republic has appeared toward the bottom of its peer group year after year.

Up until 2020, Madonna says the board was collegial. But some directors, including Madonna, were beginning to believe that Hill’s strategy wasn’t working. “It was our fiduciary obligation to periodically look at what the strategic alternatives were for the bank,” Madonna says. Hill alleges that the group wanted to sell the bank, something he vehemently opposed. Madonna says while this option wasn’t off the table, they weren’t seeking a buyer. But Madonna’s group of board members was growing skeptical of what he calls “extremely optimistic” forecasts put forth by Hill. “It was just growth, growth, growth,” says Madonna. “He had three directors that no matter what he said, they put their hands up and said, ‘Yes.’”

“The board meetings became poisonous,” he adds. Madonna describes deliberations as “personal and hostile.”

Directors felt they couldn’t ask questions, he says, claiming that Hill would leave the meeting or refuse to answer. “[H]e wasn’t a person who knew how to discuss things in a reasonable manner. He had his model, and everything had to fit his model.” Directors received the agenda the day before meetings, Madonna alleges.

Hill sees things differently, telling me that directors were prepared and involved. “We were active in moving our business plan along; we had multi-year plans,” he says. Directors may have debated and even disagreed on matters, but Hill characterizes meetings as “generally OK.”

But Madonna says that by February 2021, he had had enough – so, he stepped down as CEO and handed the reins to Hill.

Why make Hill CEO? Madonna says he was fed up with management receiving two sets of instructions, one from Hill and the other from Madonna. “You can’t run a bank that way,” says Madonna. “I said, ‘Hey, you want to run it, you run it.’” Madonna remained president and chairman emeritus of the holding company board.

Investors had noted Republic’s woes. Driver Management Co. – no stranger to running activist campaigns at community banks – had started purchasing the stock in October 2021. “We focus on banks where there is value that needs to be unlocked,” says Abbott Cooper, Driver’s founder and managing member.

Through 2022, the bank’s total shareholder return from 2016 – when Hill was elected chair – was down 50.3%, according to Schiraldi. Driver was soon joined by another investor group intent on pushing Hill out, led by George Norcross III, Gregory Braca and Philip Norcross. Both George Norcross and Braca worked under Hill back in the Commerce days. George led the bank’s insurance brokerage and served on the company’s board. Braca stayed with TD following the acquisition, eventually becoming CEO of TD’s U.S. operations.

Braca and the Norcross brothers – both influential in New Jersey politics – saw a struggling bank in a familiar footprint: Pennsylvania, New Jersey and New York. “With the right leadership, the right oversight and governance, the right strategy, this could be a winning organization,” says Braca. Like Driver, the Norcross brothers and Braca wanted Hill out – but they wanted Braca in as CEO.

As the Norcrosses and Braca escalated their campaign, the division in the boardroom became public. Madonna – with fellow board members Andrew Cohen, Lisa Jacobs and Harris Wildstein – issued a press release in March 2022, stating their concerns about “potential harmful actions” by the other half of the board. They asked that several proposals be tabled until after the 2022 annual shareholder meeting, including agreements around services provided by Shirley Hill’s firm, InterArch; the opening and renovation of new branches; and augmented severance payments connected to Hill’s service on the board and as CEO.

In the defamation lawsuit filed against Republic and Madonna’s faction, Hill and Spevak called the accusations levied by that group “knowingly false and defamatory,” noting that the board had approved the contract for InterArch year after year and that the opening of two new branches had been authorized years earlier.

As Elson points out, it’s hard for a board to get anything done when it’s split evenly between two factions.

Republic’s annual meeting, last held in April 2021, had been postponed. But the stalemate broke on May 11, 2022, with the death of Flocco, the board member and Hill’s longtime friend. Just two days later, the Madonna majority appointed him as interim chairman; Hill remained CEO and a member of the board. The battle wasn’t over – litigation followed, with the directors suing each other – but Flocco’s death spelled the beginning of the end for Vernon Hill’s tenure at Republic. Legal issues that stalled Madonna’s re-appointment as chairman were resolved in late June, favoring the Madonna faction. Hill stepped down as CEO, and the directors who had voted with Hill left the board.

Tom Geisel, the former CEO of Sun Bancorp and executive at Webster Financial Corp., was named CEO by the end of the year. Madonna says the company now aims to slow the growth, restructure the balance sheet and rein in costs.

But things remain unsettled at Republic. Driver resolved its activist campaign with the appointment of former Texas Capital Bancshares executive Peter Bartholow to the now seven-member Republic board. Late in 2022, Hill sued Republic over the continued use of the branding elements developed by InterArch for the bank, some of which featured Hill and Duffy. Madonna tells me Republic has moved away from Hill’s marketing style – though the big red ‘R’ remains.

And the Norcrosses and Braca still want a seat at the table. As of Feb. 27, 2023, the group proposed purchasing $100 million in stock, with board seats commensurate with its stake in the bank. But they’re willing to wait and see how Geisel performs as CEO. “You can’t just blame Vernon … at least he had a growth strategy,” says Braca. “Before [Hill], this was a sleepy little bank that had basically no growth.” He blames the legacy board, and questions whether Geisel will be empowered to effectively raise capital and turn the bank around, citing the lingering issues with Republic’s bond portfolio. “It’s a troubled situation, and it’s exactly why another bank can’t buy this place, because of the mark-to-market issues on that bond portfolio,” he says. “This was a board that oversaw a strategy that said, ‘We’re going to increase our costs and expenses, [and] raise deposits at a premium to what everyone else was paying at the time, which was nearly nothing.’ This was a board that oversaw all this.”

The bank still hasn’t held an annual meeting when this issue went to press, and it’s playing catch-up on its quarterly filings. Nasdaq has threatened to delist the stock as a result. On March 10, Republic announced a $125 million investment from a group that includes Castle Creek Capital; the asset manager will have the right to appoint a director.

And the board division has taken its toll on investors. Those include Hill, who owned almost 10% of the stock in March, and Madonna, but they also include smaller owners who truly believed in Hill’s vision. In the bank’s first quarter 2021 earnings call, a shareholder recalled a personal connection with Commerce. “Vernon, from the beginning, my mother used to work for you … I’ve been in the bank a long time. I’ve lost a lot of money.”