Metro Bancorp, the planned combination of Philadelphia's Republic First Bank and Harrisburg's former Commerce Bank of Pennsylvania, has big plans but isn't a sure thing, Joseph Fenech, managing director at Wall Street bank investment advisors Sandler O'Neill and Co., told clients in a report to investors today.
Crunching the latest quarterly numbers from Commerce PA (Republic's come out tomorrow), Fenech write that merger "savings will be mostly offset by costs relating to the company's aggressive expansion plans. At this point, we are assuming the company will open 5 new branches in 2010," one in Harrisburg, four in Philadelphia, from the current 45. Loan losses "are the biggest wildcard" for Metro: "We would like to see more of a reserve."
Metro's main near-term goal "is simply to obtain regulatory approval to complete the transaction" by the Federal Reserve Bank of Philadelphia. It'll be run in part by "recent hires of former executives from Commerce Bank of New Jersey." Commerce founder Vernon Hill is Metro's lead investor and the banks plan to use his fast-growing, retail-friendly business model.
The "bull case": Hill's allies who now run the banks have a platform from which they can execute the highly successful strategy employed by the former Commerce (Bancorp). Management will aggressively move the company into better growth markets in Pennsylvania and, eventually up through New Jersey, in essence re-creating the old Commerce franchise." If you buy that story, Metro's now a bargain, Fenech says.
The "bear case": "Higher-than-expected credit costs will eat into the capital cushion, and restrict the company's near-term expansion opportunities. In essence, what is now perceived as growth capital will in actuality be needed to absorb losses over the next year or so." Commerce Bancorp's "strong top-line growth" more than made up for its high expenses. But Metro "will need to generate top line growth in arguably a more challenging operating environment."
So Fenech splits the difference. Even if Hill's people can't make Metro profitable, "the company would likely fetch a premium" from a buyer... assuming no credit or capital problems... which Fenech isn't ready to do yet. So "our HOLD rating remains most appropriate."
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