This is not an especially opportune time to go looking for opportunities in the community bank space. While some of the industry’s larger basket cases have rallied heroically since March, community banks’ worst days are likely still in front of them, since commercial real estate tends to be their bread-and-butter and CRE has only just begun rolling over.
If one is prepared to take a longer-term view, however – looking for long-term value creation across economic cycles – then an interesting franchise is taking shape in Pennsylvania.
Harrisburg-based Metro Bancorp (NASDAQ:METR) was until this year known as Pennsylvania Commerce Bancorp, trading under ticker COBH. As such, the bank had the distinction of being a franchise of Cherry Hill, NJ-based Commerce Bancorp, acquired by Toronto Dominion (NYSE:TD) in 2007.
Under founder and CEO Vernon Hill, Commerce reinvented many aspects of retail banking, from more convenient branch locations and more welcoming branch interiors, to expanded branch hours and the elimination of nuisance fees, to free coin counting machines in every branch. As a result, Commerce sustained some of the strongest deposit growth in the industry driven by market share gains from incumbents in its markets. This in turn translated into enviable earnings growth.
Pennsylvania Commerce – now Metro – pursued the same strategy under the same brand in central Pennsylvania, a slower growing market. The pending acquisition of Philadelphia-based Republic First Bancorp (NASDAQ:FRBK) will hasten Metro’s move east, into the larger, wealthier, faster growing markets that had been the home of Commerce Bancorp.
This occurs against the backdrop of a bank industry that binged on de novo branching in the middle part of this decade, and is now retrenching. Across the country, expect to see branches closing not only due to merger and acquisitions, but also because many recently-opened branches were ill-conceived and have little hope of gaining sufficient deposits to justify their costs. As larger players retrench, Metro stands to benefit.
In the year ended June 30th, Metro grew its non-interest bearing demand deposits by 10%, and interest-bearing demand deposits (on which it paid an average interest rate of just 0.95% in the second quarter) by 11%. These are the stable core deposits that represent long-term franchise value.
Metro isn’t immune to credit deterioration, however. Over the past year nonperforming assets more than doubled from 0.65% of assets to 1.61%. With CRE equal to 27% of total loans, and commercial loans equal to 52% of total, nonperformers will likely rise further. But reserves are a respectable 1.33% of total loans, and net charge-offs in the most recent quarter were just 0.04% annualized.
With the move into more lucrative markets, and larger banks pulling in their horns on branch expansion, Metro stands a good chance to emerge as one of the strongest secular growth stories in the banking industry. The next few quarters are going to be rough for community banks. Still, with the stock trading at a 7% discount to tangible book value of $17.97, Metro is very interesting from a long-term perspective.
Disclosure: No positions