Metro: Back to De Novo Roots in Pennsylvania

Thwarted in its attempt to buy its way into Philadelphia, Metro Bancorp Inc. is opting to build.

Gary L. Nalbandian, the Harrisburg, Pa., company's president and chief executive, said it will expand organically after its bid for Republic First Bancorp Inc. in Philadelphia collapsed.

"We've decided it was just dragging on too long and it was just too uncertain," Nalbandian said in an interview Tuesday. "We are just going to get back to our basic plan of growing eastward from our existing footprint in central Pennsylvania."

Over the next three to five years, the $2.1 billion-asset Metro will build 10 to 20 branches as it fleshes out a contiguous network stretching from Harrisburg to Philadelphia, Nalbandian said.

That of course will take longer than Metro's initial plan to buy the $1 billion-asset Republic First, which was called off Monday after nearly a year and a half of trying to combine the companies — which share close ties to longtime banker Vernon W. Hill 2nd — into a second iteration of Hill's Commerce Bank. Despite several extensions, and Metro's highly dilutive capital-raising effort, regulatory hurdles proved insurmountable.

Analysts said given the effort Metro put into the deal, the inability to close it is disappointing.

"It would have been nice for them to start out in Philadelphia with 12 branches," said Sean J. Ryan, an analyst at Wisco Research. "At this point, though, there is a lot to be said about just cutting the bait and getting on with life."

Moving on and moving into Philadelphia is where Nalbandian's attention is now focused. The company has already launched its branch-building plans — it has five sites under contract in central Pennsylvania and three possible sites in suburban Philadelphia.

It's a path few banks are following these days. Healthy companies often opt to buy branches from strugglers, while others remain focused on simply surviving the tough economic environment.

Yet industry observers said Metro has 25 years of experience executing this strategy.

Metro started out as Pennsylvania Commerce Bancorp Inc., an offshoot of Hill's larger Commerce Bancorp Inc. in Cherry Hill, N.J. Operating as a unified brand in the Middle Atlantic, the companies were known for a retail network with extended and weekend hours as well as high-touch service. "We have always operated under that model and we will continue to do so as we expand," Nalbandian said.

That growth was interrupted in July 2007 when Hill resigned from Commerce under regulatory pressure stemming from disagreements over the use of companies owned by family members in building its branches. Commerce was sold to Toronto-Dominion Bank's TD Banknorth Inc. of Portland, Maine, in March 2008.

Hill, a major investor in Metro, led a $10.8 million infusion in Republic First in mid-2008. He has an exclusive consulting contract with the company and designated one of its board members.

Analysts have speculated that Hill's affiliation with Metro was a contributing factor in why the deal didn't win approval, given Hill's complicated relationship with regulators.

"Metro tried really hard to make it happen, they had a great amount of zeal for it and the very strong rope of Vernon Hill tethering those two together," said Jeff Marsico, executive vice president at Kafafian Group Inc., a consulting firm in Parsippany, N.J. "But when regulators don't like a transaction, they are going to make obtaining approval very difficult."

Nalbandian said the application was stalled at the Federal Reserve and the Pennsylvania Department of Banking. He declined, however, to comment on regulators' concerns. "It is what it is," Nalbandian said. "I really don't think that the regulators ever really list concerns or want us to talk about them."

Both regulators declined to comment for this story.

Hill could not be reached for comment. He is focusing his efforts in Britain, where he has gained approval to build a bank.

Another problem for the deal may have been Republic First's growing pool of problem loans. As of Dec. 31, its nonperforming assets totaled $39.6 million, or 3.93% of total assets, more than double a year earlier. A call to Republic First was not returned.

Late last year Metro raised $78 million in equity in a move that nearly doubled the number of its shares and was widely regarded as a further attempt to prove that it could take on Republic First. Nalbandian said that capital now will be deployed in the de novo growth strategy.

Analysts said that in time the branch-building strategy may work well for Metro.

"I think it is a good way to go. When you acquire a branch, it can be more work to get the staff on the Commerce model of service," Ryan said. "Building is obviously much slower, but I think it is ultimately results in a bigger boost to shareholder value."