Sell. Sell. Sell.
That is the chant coming from three activist investors that think Metro Bancorp (METR) in Harrisburg, Pa., should hire an investment banker and find a buyer.
The $2.9 billion-asset company has received letters in the last month from two of its biggest shareholders, PL Capital and Basswood Capital Management, urging management to consider selling. A third investor, Clover Partners, even estimated the price it thought Metro could fetch from a buyer.
Though each letter has its own approach, they all arrive at the same points: Metro is underperforming based on metrics like efficiency and return on assets; its model is hurt by low interest rates; and management's plan to add branches and loans are not enough to improve its financial results.
"Expenses will continue to grow as management focuses on building more branches to support future loan growth," Matthew Lindenbaum at Basswood wrote in a June 3 letter.
"But the growth will not be strong enough to meaningfully lever the current expense base," Lindenbaum wrote, adding that management is not expecting a return on assets higher than 0.95%.
In comparison, he wrote that banks with $1 billion to $5 billion in assets should produce a return of at least 1%. "We strongly believe the best course is for [Metro] to begin a process that leads to a sale of the company to a larger bank," Lindenbaum wrote.
Clover has been pushing Metro to sell for "a while" through various conversations before deciding to make its efforts public on June 13, says Johnny Guerry, a partner at the investment firm.
While PL and Basswood have said Metro could fetch a premium from selling, Guerry went further by suggesting the company could sell for $29 to $30 a share, representing a roughly 175% of Metro's tangible book value.
Besides a couple of exceptions like Metro, Guerry says his firm is primarily a passive investor. Still, he sees a rise in activism among firms like his.
"Shareholders are frustrated with the returns being produced," Guerry says. "There are economically compelling deals that can be consummated with some of the larger banks. More shareholders will be speaking up and putting pressure on management to close the value gap."
Calls to Gary Nalbandian, Metro's chairman and chief executive, were not returned. M&A involving Metro, however, is far from a foreign concept. In November 2008, Metro, then known as Pennsylvania Commerce Bancorp, agreed to buy Republic First Bancorp (FRBK) in Philadelphia.
The deal was called off in early 2010 when it failed to gain regulatory approval. Some industry observers said at the time that regulators were likely uneasy with former Commerce Bancorp CEO Vernon Hill 2nd, an investor in Metro and Republic First.
Hill resigned from Commerce in 2007 under regulatory pressure; the bank was sold TD Banknorth the following year.
Frank Schiraldi, an analyst at Sandler O'Neill, speculated last year that Metro and Republic First could have been interested in reviving their deal.
Schiraldi, a Metro shareholder, said Thursday that such a deal is no longer likely. He declined to specifically comment on the activists' push for Metro's sale.
There are a number of banks that could have an interest in Metro, the activists say.
"There could be numerous potential acquirers," says Richard Lashley, a principal at PL Capital. "Really, that is up to Metro's board to make the right decision."
"There's a healthy list of suitors," Guerry says. National Penn Bancshares (NPBC) "could be the most logical buyer, but there are a number of potentials."
Schiraldi agreed that National Penn could have an interested in Metro, but he added that F.N.B. Corp. (FNB) could be in a better position to buy Metro if a sale took place. F.N.B., given its currency advantage, "is the acquirer of choice in the market," he says.
It is unsurprising that Metro is being targeted by activists, says Jeff Marsico, an executive vice president at the Kafafian Group. Metro's highest return on equity was 0.73% in 2004. In the first quarter, the return was 0.64%. Nalbandian is in his early 70s, which makes the company a likely target, Marsico says.
"Metro has never really achieved top-tier financial performance," Marsico says. "Having older management also makes them ripe for picking."
As activists salivate over a deal, Metro is pitching its organic growth plans. In its presentation for its annual meeting held last month, Metro said it would enhance shareholder value by increasing revenue through organic loan growth, deposit growth and fee generation. In 2015, it expects to have $3.3 billion in assets, $2.1 billion in loans and $2.5 billion in deposits. It also projects it will have 40 branches in 2018, compared to 33 now.
Such expected growth is insufficient to improve Metro's performance, Lashley says. "Another $1 billion in assets and deposits isn't going to move the needle meaningfully."