Fox Chase Bank in Hatboro, Pa., had been a traditional thrift making mostly mortgages for well over a century before it began ramping up its commercial real estate and construction lending in 2002.
That brought Fox Chase nothing but trouble, though, and within two years the Office of Thrift Supervision had imposed a draconian cease-and-desist order that prevented it from doing any more business lending and ordered a change in leadership.
Enter Tom Petro.
Since taking over as the president and chief executive officer in mid-2005, Mr. Petro has led a turnaround that culminated in an initial public offering this past fall. Now, flush with $125 million of capital, the $756 million-asset Fox Chase — which has never made an acquisition in its 140-year history — is looking to buy a bank in the Philadelphia suburbs.
Emphasis on bank.
"We don't have any appetite for nonbanking businesses," he said.
Mr. Petro, 47, who succeded in getting the cease-and-desist order lifted a year after his arrival at Fox Chase, has experience handling troubled banks. He joined Northeast Pennsylvania Financial Corp. in Hazleton as its CEO in June 2003, after a spike in nonperforming loans caused millions in losses there. He led it through a turnaround phase that included restating five years of earnings.
The $836 million-asset Northeast Pennsylvania sold itself in May 2005 to KNBT Bancorp in Bethlehem for $98 million. A few weeks later Mr. Petro was at Fox Chase.
Though no analysts follow the thrift, Wilson Smith of Boenning & Scattergood Inc. in Philadelphia said he was about to start covering Northeast Pennsylvania when it sold itself and has kept tabs on Mr. Petro since then.
Mr. Smith said he is impressed with the new and improved Fox Chase.
"Tom came in, and he had carte blanche to restructure that organization," he said. "He's accomplished a tremendous amount in a short period of time."
Among Mr. Petro's first priorities was overhauling its credit and lending, to address the problems that regulators found.
He blamed Fox Chase's woes on poor underwriting and lack of internal controls, as its commercial real estate and construction portfolio went from roughly zero to $160 million over a few years, with a heavy concentration in residential construction loans on the Barrier Islands at the Jersey Shore.
The problems cited by regulators included exceeding the limits for loans to a single borrower, conducting inadequate appraisals, violating restrictions against insider lending, improperly classifying assets, and inadequately reserving for potential losses, Mr. Petro said.
The cease-and-desist order had essentially shut down the bank, even preventing consumer loans and mortgages to all but the most pristine borrowers, he said.
"There was no question that the issues pointed out by the regulators as part of the cease-and-desist order got to deep, systematic, operational issues within the company," Mr. Petro said. "We had to correct the deficiencies."
It has done that. As of Dec. 31 nonperforming assets had dropped 38% from a year earlier, to $3.2 million, mostly as a result of workout strategies, and the allowance for loan losses fell 69%, to $2.9 million. The ratio of nonperforming assets to total assets dropped 22 basis points, to 0.43%.
Fox Chase also has scaled back its construction and development lending significantly. At the end of 2004 it had nearly $100 million of construction loans on its books. By the end of last year the portfolio had shrunk to about $13 million.
Mr. Petro said Fox Chase is still making residential construction loans, but it "is carefully choosing borrowers and projects."
Another top priority when he took the helm was recruituing a new management team, and he raided experience from the likes of Mellon Financial Corp. and Visa International. Then he touted their top-notch credentials to attract an impressive board full of business veterans.
"Four of our seven directors come right out of New York Stock Exchange boardrooms," Mr. Petro said.
Fox Chase's plans for a public offering helped in the recruiting, he said.
In the fall it formed a holding company, Fox Chase Bancorp Inc., which retained about 56% of the stock, but sold the minority stake for $10 a share.
On Oct. 2, its first day of trading, the stock gained 29.5%. Since then the thinly traded shares have topped $14 for brief periods but stayed mostly at around $13. The shares closed at $13.50 Wednesday..
Mr. Petro makes a point of sharing the credit for Fox Chase's turnaround. He took care to mention all of the top executives by name, along with each board member. He also gave a synopsis of everyone's experience, punctuated by superlatives. "One of the brightest financial minds I've ever worked with," he'd say for one. "One of the sharpest strategists I've ever met," he'd say for another.
Though Fox Chase is still largely a traditional thrift — home mortgages account for 83% of its overall loans — Mr. Petro is working to change its image. Two offices it opened last summer are called "business banking centers," and Fox Chase is targeting commercial customers, particularly privately held companies, professional practices, and real estate firms.
"We're really changing the footings of the bank from being 100% retail to being mostly focused on business," he said.
Fox Chase added remote deposit capture last summer and promoted the service in an advertising campaign aimed at business customers. As he sees it, the first bank that gets a business to use the service "wins."
"Once a scanner is on your desk and you're using it, no other bank can come around and offer you a value proposition more convenient than that," he said.
Aside from using its capital infusion to spur organic growth, Fox Chase is on the acquisition hunt, Mr. Petro said.
Its goal is to be in all the Philadelphia suburbs, covering the five counties in the southeastern corner of Pennsylvania, along with southern New Jersey and Delaware.
However, Mr. Petro has little interest, in buying an insurance agency or a trust company. He said that his former company, Northeast, had a trust company and a large commercial insurance operation, but bank operations still generated 97% of its earnigs.
"I don't see very many community banks executing that multibusiness line strategy very well, if you really pull it apart and look at it," he said.
Mr. Smith said many banking companies, challenged by the flat yield curve and eager to increase fee income, are buying up insurance agencies and asset managers. That is particularly true for converted mutuals that get a cash infusion from a first- or second-step stock offering and then feel they have to put the money to use, he said.
"But generally speaking, it takes a very heavy toll on your tangible book number," he said. "So it has negative capital implications."
Fox Chase's somewhat contrarian strategy not to diversify its revenue is a "differentiator," Mr. Smith said.
"I think, to a certain extent, Tom doesn't want to take his eye off the ball," he said. "First things first, he wants to build a bank, and I agree with that thinking."
The pressure of turning around troubled banking companies can be intense, so Mr. Petro said he takes a personal retreat every year, typically in June, and spends a week at a monastery in total silence.
"It's almost like an annual car wash for my soul," he said. "I treat that week as my New Year. That's the beginning of my personal calendar. It's a time of reflection and really deep rest, a time of just reenergizing and reclaiming my essential self."
