Graystone Financial Corp. in Harrisburg has been one of Pennsylvania's fastest-growing banking companies since it was founded three years ago.
But like many its size, the $616 million-asset company says it needs scale in an increasingly challenging operating environment, and last week it agreed to a merger of equals with the $550 million-asset Tower Bancorp Inc. of Harrisburg, the parent of First National Bank of Greencastle.
"We were growing fast, but this is just going to accelerate those plans even further," Andrew Samuel, the chairman and chief executive of Graystone, said in an interview Friday.
The combined entity would be named Tower Bancorp and its two separately branded banks would have 25 branches in central Pennsylvania and northern Maryland.
Mr. Samuel would become president and CEO of the combined company, and Jeffrey Shank, Tower's president and CEO, would become executive vice president of the holding company and the president and CEO of Tower Bank, a division of Graystone Tower Bank. (Tower Bank would be the brand name for First National of Greencastle's current branches; Graystone's existing branches would operate under the brand Graystone Bank, a division of Graystone Tower Bank.)
Robert E. Kafafian, the president and CEO of Kafafian Group, a community bank consulting firm in Parsippany, N.J., said he expects more mergers of equals in community banking in this environment because they allow the banks to spread their costs over a larger asset base, improving their efficiency.
Moreover, he said, smaller banks that once might have been targets of larger regionals are likely to consider merging now that the regionals are being gobbled up.
Matthew Schultheis, an analyst at Boenning & Scattergood Inc., pointed out that Graystone's profitability ratios have been below average as it has focused on growth. It had to choose between curtailing its growth and becoming more profitable, or reducing expenses and enhancing profitability by teaming up with another bank, Mr. Schultheis said.
Graystone and Tower said in a joint announcement that "there are no scheduled branch closings," but after "an initial evaluation period … some duplicating positions may require streamlining."
In what has been a slow year for bank mergers and acquisitions, Pennsylvania has been a hotbed of activity. The Graystone-Tower deal is the ninth this year involving a Pennsylvania bank, according to Carson Medlin Co. Only Texas, with 13, has had more.
Also last week, Pennsylvania Commerce Bancorp Inc. of Harrisburg announced it is buying Republic Bancorp Inc. of Philadelphia.
Since September, Tower's First National Bank of Greencastle has been operating under a memorandum of understanding with the Office of the Comptroller of the Currency. The agreement requires the bank to develop and implement a loan review system; refrain from any unsecured lending without obtaining current borrower information; and take action to protect criticized assets, among other things.
Tower officials did not return phone calls, but Mr. Samuel said that most of the issues surrounding its lending underwriting practices have been resolved, including the hiring of a chief credit officer.
Graystone is privately held and Tower is publicly held, its shares traded over the counter. Mr. Samuel said the new company would be publicly held and intends to apply for a Nasdaq listing.
The combined company's board would consist of 20 members designated by Graystone and Tower. The deal is expected to be completed next quarter.
