What does a small bank do when a much larger bank encroaches on its home turf?

The $286 million-asset East River Bank, which operates three branches in Philadelphia, has been grappling with that question since November. That's when BB&T in Winston-Salem, N.C., announced its deal for Susquehanna Bancshares.

In less than a year, BB&T will move from having no presence in the Philly region, to being a top 10 player in the metropolitan area, with about 1% of the retail deposit market, according to FDIC data.

The $210 billion-asset BB&T gained 58 branches in metro Philadelphia after it closed its Susquehanna purchase; BB&T stands to gain 45 more Philly-area branches, if its agreement to acquire the $9.6 billion-asset National Penn Bancshares in Allentown, Pa., closes. BB&T does plan to close 25 National Penn branches, although not necessarily all in the Philadelphia area; National Penn operates a total of 133 branches in all its markets.

As a result, East River may be forced to tweak its strategy. Christopher McGill, East River's chief executive, spoke with American Banker about the challenge that his bank and others face with BB&T, the vitality of the Philadelphia housing market and other topics.

How will BB&T's purchase of National Penn affect the banking community and market in Philadelphia?

CHRISTOPHER MCGILL: The purchase of National Penn and Susquehanna will, over time, create a large, well-run bank in place of two regional banks that were not as impactful independently. Both companies appeared to struggle with their identity and how to move forward and grow post-recession. BB&T has purchased size and market share and, once the cultures settle, I expect them to be a strong competitor.

Some small banks have looked to capitalize on BB&T's activity in Pennsylvania. What opportunities do you see for East River?

As always, change triggers opportunity. In the early stages, as the dust settles, there's always fallout at every level. We get the opportunity to gain customers and to add new bankers to our team. We have already benefited from the recent 3rd Fed Bank - National Penn deal.

With increasingly larger fish in the pond, what does that mean for smaller banks in Pennsylvania?

We are in an active M&A cycle, where the industry continues to consolidate. What we don't see in this cycle [are] de novo applications seeding the next cycle. Could the high cost of operating, low interest rates, compliance ... be the reasons for the scarcity of the new charter applications? Maybe, but this is a fundamental change to our financial system. The small community banks provide access to credit to small businesses and entrepreneurs, unlike their large bank competitors. As banks grow in size, there are factual feasibility issues. Larger banks cannot deny that forces "cookie cutter" lending. If access to credit for small businesses goes this way, the impact will ripple in ways we have not seen in generations.

Some analysts believe it might not be long before BB&T looks to acquire another Pennsylvania bank. What would another deal mean for East River -- and do you think your bank could be a target?

I don't know what BB&T's plans are, but they are clearly an acquirer. We will be alert, continuing to win fallout opportunities while growing.

East River is an active lender in the Philadelphia real estate market. How would you characterize that market today?

The trend is [that people are moving] back to the city. People are utilizing public parks and other common amenities that would have been their yard in their suburban house. The trend of going back to the city is for smaller, more manageable houses. You're in a much smaller maintenance situation then.

It's always a supply-and-demand thing. [It's about the] amenities and quality of life. There are bike shares, you can walk to a café for some coffee. There's a benefit to places that are more efficient because of public transportation, lower fuel costs, more walkability.

Philadelphia's had a pretty good run over the past few years. The city now has better housing. There's a tax-abatement program for new construction, which makes the costs of building more attractive. There's a decent amount of higher-end construction in the city for rent. These are higher rents than the city has typically seen.

Have you seen evidence of new-purchase mortgage applications in Philadelphia? If so, are any of these people buying their first homes?

We lend all over the city and in surrounding counties around Philadelphia. Most of the loans we've been doing are for existing homeowners. Some have been relocations from larger homes, like empty-nesters.

The Federal Home Loan Bank of Pittsburgh has [a] first-step homebuyer program. We've participated in that. But the majority of our business has been existing homeowners. We're known in the market for renovation or rehab loans.

What about the mortgage refinance business?

Most of it has been trades and transactions where people are buying homes. There's still some, but not nearly like a few years ago where that was the lion's share of business. Most of the people who have taken advantage of that have done so.

How did the Philadelphia market influence your marketing campaign on Twitter?

The idea was born out of talking with our marketing agency about our market being high-density, stable and urban. The images and the people we used for the campaign are very reflective of our customers. It was different, which I liked, because it caught the eye. This was more the thrift shop owner down the street, or the local ice cream shop worker making candy. These are real customers.

The reaction has been largely positive. You'll run into some close-minded people at times who find offense in something. One of our ads was an interracial ad, and I did get calls about that, saying they wouldn't do business with us. And that's fine.

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