Fox Chase Bancorp hired Thomas Petro as president and chief executive in mid-2005 with a mission to turn around a mutual thrift that was fighting to survive.

By his own judgment, Petro deems his work a success. The $1.1 billion-asset company was once weighed down with bad loans and a portfolio that was loaded with residential mortgages. Absent major changes, the Hatboro, Pa., company was headed toward near-certain failure, Petro says.

In a wide-ranging interview, Petro discusses his efforts to help Fox Chase evolve from an old-school thrift to a thriving commercial lender. This is an edited excerpt.

How would you assess your performance as CEO?

PETRO: We are a regulatory success story. There aren't very many. In 2004, in a safety and soundness exam, the OTS determined that there were such significant concerns that immediate and dire changes were needed. I began in June 2005 and the place was not in good shape. Had I been hired two years later, this probably would have been a liquidation. Moving early in the cycle really saved the bank.

Prior to my joining, the bank had moved from being a traditional 1-to-4 family lender into doing large-scale commercial housing related transactions that were really commercial loans, and they were complex. They did this with the same talent pool. They had no experience in complex construction lending. The examiners made note of it a couple years earlier.

Because of growth in the portfolio, there was a whole new set of issues that needed to be remediated. Examiners identified $91 million of problem loans out of a $130 million portfolio. Think about how deficient the lending processes had to be for three out of four of this bank's loans to be classified as problem loans? The regulators mandated that the board that was in place at the time had to resign.

I had to rebuild the governance structure and the internal control system and business processes. On a number of occasions [Fox Chase] had exceeded their legal lending limit and didn't know it.

Fox Chase restructured its balance sheet last year. Did it accomplish what you wanted?

If you look at 2006, you'd see that 58% of the loans were 1-to-4 family residential mortgage loans. There really wasn't a true commercial business. On the deposit side, CDs represented 69% of funding.

Jump ahead to 2012, and 1-to-4 family residential loans are 23% and commercial loans are 73% of the portfolio. CDs are down to 45% and noninterest bearing represents 16%. We also shrunk the balance sheet, from $900 million to $750 million in total assets, to shore up our capital ratios.

We also started to aggressively work out and exit the problem loans. It's hard to believe, in light of what's happened since 2008, that we were able to collect $91 million without a dollar of loss. It was more good luck rather than good management.

You have focused on C&I loans, an area many banks are pushing. Can you discuss competition and pricing pressure?

Before you get to pricing, you have to have the right people. My first week in office, I literally dismissed all of my direct reports. I realized they didn't have the technical capability or the cultural fit to be part of what we had to do.

When I got to September [2005], I had most of my management team in place. By the time we [filed a registration statement in spring 2006 for a second-step conversion], we had gotten that next level built out. I called it a 138-year-old startup. That's really what we were. Getting the right people on was key.

Regulators allowed us to [expand] into the commercial world. From 2005 to 2006, there was a big increase in operating expenses, to bring in those people. We were literally laying the chassis of a commercial bank on top of the frame of an old residential thrift.

With pricing, I have a real hard time going after that prized AAA client. The people we compete against have so much [more] pricing power than we do. They will always win on price, if they want to, every day, every deal. We have to position ourselves for the A- and BBB-type credits, where they have a strong management team but some type of blemish in financials that would be hard to get past an underwriter. If you understand the company, you can go in with a very tight structure and put a package in place that will address their immediate needs. But we can also extract a nice premium to market-based pricing.  This is what I call our scratch-and-dent opportunities.

What's your target client?

Middle-market companies with [up to] $17 million in [cash flow]. Companies as big as $500 million in sales who believe their only service provider is one of the national or international banks, and we tell them we can create a local alternative. These companies are too small to command attention from the big places. We don't have any of the legacy [technology] problems associated with the large international banks. That makes the customer experience more effective and efficient.

How do you address low interest rates and weak loan demand?

In the middle market, loan demand is better than what's broadcast. You have to distinguish between high- and low-quality demand. There's a ton of low-quality loan demand. You really have to screen so many more opportunities to find the ones you are willing to put capital to risk on, in this climate. I have a team that is able to generate those looks for us.

What other businesses do you need to add?

There's only one area that is a little troubling: a true mobile banking app. It's yet to launch. In the middle-market, they're not really asking for [mobile banking], but it will be critically important to attract low-cost deposits. We have a game plan. We know what we want to do. It's all teed up and ready to go.

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