'New' bank on midstate horizonMergers create unique opportunity for group of investors to acquire, relocate struggling bank
A unique opportunity exists in Central Pennsylvania banking, but it won't last long. Former state Rep. Gordon Denlinger of Lancaster County knows that.
That's why he and seven other investors — including some prominent Lancaster County businessmen — are working quickly to finish their acquisition of Chester County's Stonebridge Bank.
Denlinger said he has long had dreams of starting a new bank; before he was a state representative, he worked in finance. But he said that instead of starting fresh, the cheaper and more efficient move for his group was to buy a struggling bank for the charter, rename it and then relocate it wherever the new owners wanted.
For Denlinger and his group, that means moving operations of the former Stonebridge into Lancaster County, raising at least $10 million in capital and weighing plans for expansion into Dauphin County. A move to the midstate, he said, would allow the still-unnamed bank to take advantage of market disruption caused by the sale of four local banks in the last year and another, National Penn, that has a history in the region.
The market disruption is so deep, Denlinger said, he believes it can support a new community bank in the region.
The investment group intending to buy Stonebridge Bank and move its operations to Lancaster County features some familiar names from the business community:
• Gordon Denlinger, former state representative in eastern Lancaster County
• Norman Hahn, retired founder of Conestoga Wood Specialties Corp., East Earl Township
• Anthony Hahn, president of Conestoga Wood Specialties Corp.
• Ronald Shepherd II, owner of Shepherd Real Estate LLC, Manheim Township
• David Miller, CEO of Smart Pay Rentals, Upper Leacock Township
• Brian Denlinger, vice president at Precept Marketing Group Inc., Elverson
• H. Merle Denlinger, president of El-Mor Chevrolet Inc., Morgantown
• Randall Renninger, partner at InSite CPAs LLP, Lancaster
“We do think there is serious business to go after, and we intend to be a player,” Denlinger said.
Local banking execs said they've seen market disruption when just one bank is acquired. But by mid-2016, four midstate banks (Susquehanna, Metro, Integrity and First National Bank of Fredericksburg) and one regional bank (National Penn) all likely will have disappeared.
The five banks accounted for a little more than 24 percent of the deposit share in the midstate in fiscal year 2014, the last full year all five were operating in the market, according to the Federal Deposit Insurance Corp.
The investment group won approval to buy Stonebridge and its assets for $570,000 after submitting the winning bid in U.S. Bankruptcy Court in November. The bank went on the auction block after holding company Stonebridge Financial Corp. declared bankruptcy in June.
The road to bankruptcy was a quick one for the bank, which opened in 1999. Ted Peters, chairman of Bluestone Financial Institutions Fund in Wayne, said the bank almost immediately started making the bad loans that ultimately sank it. The opening of a loan-production office in Virginia was a “total disaster,” he said.
At the end of 2008, Stonebridge had $487 million in assets. Now down to one branch in West Chester, the bank has $122 million in assets, $104 million in deposits and $81.5 million in loans.
“The fact that the government didn't take them over, I think that shows how much (the government) had on its plate at the time,” said Peters, the former CEO and president of Philadelphia-area community bank Bryn Mawr Bank Co. “They had three or four branches, but you'd never really see them. They don't have much of a reputation, really.”
Now it's up to Denlinger and his group to turn the bank around. That includes a scrub-down of the bank's current loan portfolio. Eighteen percent of the portfolio's value is categorized as nonperforming — essentially loans that are not being repaid as planned.
“That's out-of-this-world bad,” said Matthew Schultheis, a banking analyst at Boenning & Scattergood Inc.
However, Mark McCollom, senior managing director and head of financial institutions practice at Griffin Financial Group LLC, said the truly nonperforming loans are about 5 percent. About 13 percent of the loans are so-called “performing nonperforming loans.” Borrowers are paying less interest than originally agreed so that they can still repay the loan. Technically, those loans must be listed on the books as nonperforming, said McCollom, who is working with Denlinger's investment group.
He said all of the nonperforming loans don't have to be eliminated from the portfolio before the purchase, but regulators must approve whatever plan Denlinger and his group construct to correct them.
“Whether that is to take a special credit charge and write them off, or assess them individually, we'll decide that,” McCollom said.
Plans already are in place to rename and rebrand the bank — “To be determined,” Denlinger said about a name — and then to hire a “highly reputable” management and sales team by the time the bank changes hands, expected in the spring. That team will need to introduce the bank to the midstate and remove the stigma it will carry for those who remember Stonebridge's problems.
The future of Stonebridge in its current home — where it has 17 employees — is in question as well. Denlinger and his group make no secret about their desire to set up an operations center for the bank in Lancaster County and expand in the midstate, but he said the bank's last remaining branch, in West Chester, has a lease through 2018. Denlinger and McCollom both said the bank could continue to have a presence in Chester County past then, but leaders will need to assess it over the next two years.
Denlinger said he expects to raise about $10 million to $15 million in capital to finance the bank beyond the purchase price.
“I liken it to a house with termite damage,” Denlinger said of Stonebridge. “I think we have something to build on and can get back to the path of profitability. We're going to be aggressive. We're going to hire the right people.”