Royal Bank of Scotland Pays Big for Philly Target: $450M Deal Is First in Effort to 'Fill In' Mid-Atlantic Region

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Royal Bank of Scotland Group PLC on Monday followed through on its often-repeated pledge to keep expanding on this side of the Atlantic by announcing a deal to broaden its reach in the Philadelphia area.

The Edinburgh-based company's U.S. subsidiary, Citizens Financial Group Inc. of Providence, R.I., said it plans to buy Commonwealth Bancorp Inc. of Norristown, Pa., for $450 million in cash. Commonwealth has $1.8 billion of assets and 60 branches in Philadelphia and five surrounding counties, including a new market for Citizens -- Berks County.

Citizens entered the Mid-Atlantic region in December, when it bought Mellon Financial Corp.'s retail branch network in Pennsylvania and southern New Jersey. Last month it trumpeted its rapid integration of the Mellon branches and said that it had completed critical system conversions ahead of schedule.

"That really set the table for us to begin to fill in our Mid-Atlantic franchise," Lawrence K. Fish, Citizens' chairman, chief executive officer, and president, said Monday. "What attracted us to Commonwealth was the rich penetration they enjoy north and west of the city of Philadelphia and the opportunity to reach out into Berks County."

Commonwealth and Citizens expect to close the deal, which must be approved by regulators and Commonwealth shareholders, in the first quarter. Mr. Fish said that it would add to Citizens' earnings next year. He would not say whether the company expects to generate cost savings, though he noted that Citizens had some overlap with Commonwealth's branch network.

Citizens is close to completing a similar deal in New England, the $273 million acquisition of Medford Bancorp Inc., which would broaden its reach in the Boston area.

In the Philadelphia market, Citizens was willing to pay dearly. Its offer of $46.50 per share was 65% more than Commonwealth's closing price of $28.12 on Friday and amounted to a little more than triple Commonwealth's stated book value. Laurie Hunsicker, an analyst at Friedman, Billings, Ramsey & Co. Inc. of Arlington, Va., called that "a very rich price."

A major reason for the high price was the dearth of acquisition targets in Philadelphia, Ms. Hunsicker said. "From the standpoint of acquisitions, there's a scarcity value now to some of these prime franchises as far as what's left."

Commonwealth is "a phenomenal franchise," with strong core deposits, good asset quality, and a solid share of the Philadelphia market, she said. …