If at first you don't succeed, go hostile?
That's Porter Bancorp Inc.'s strategy as the $1.7 billion-asset company pursues the $339 million-asset Citizens First Corp. in Bowling Green, Ky.
Porter, of Louisville, said in a Securities and Exchange Commission filing Thursday that, after agreeing last month to meet to discuss a merger, Citizens First executives backed out. So Porter forged ahead and entered into an options agreement to purchase 15.8% of Citizens First's common stock from shareholders. From there, Porter said it would press Citizens First's board for control of the company.
"We can only view this announcement as a hostile action by Porter Bancorp," Jack Sheidler, the chairman of Citizens First, said in a press release Friday.
Neither company returned calls seeking comment, but press releases from each, along with Porter's SEC filing, paint a picture of an opportunistic acquirer looking to expand its Kentucky presence and a company content on remaining independent or at least uninterested in pairing with Porter.
"We believe that a combination between Porter Bancorp and Citizens First could increase value for the shareholders of both companies," Maria Bouvette, Porter's president and chief executive, said in her company's release. "We have made our interest and willingness to discuss a possible transaction clear to Citizens First's directors and executives."
Hostile takeovers are rare in banking mainly because they are complicated and often do not work out as intended.
"They are extremely unusual and they can turn into these long battles that end up damaging the institutions," said Neal J. Curtin, co-head of the financial institutions and regulatory practice at the law firm Bingham McCutchen LLP in Boston. "We might start seeing more with wise-guy shareholders that come in and pressure the board to sell, but a bank going after another bank is even more unusual."
In its SEC filing, Porter said that after Citizens First backed out of the scheduled meeting last month, the target's board sent a letter saying it was not interested in selling. Porter claims in the SEC filing that its moves were prompted by various Citizens First shareholders who, over the past two years, urged it to buy the company.
On Oct. 14, Porter entered into the options agreement with unnamed shareholders to buy their shares for $9 apiece, a 127% premium to the company's previous day closing price.
News of Porter's intention to wage a hostile takeover sent Citizens First's stock soaring Friday, with the shares closing at $7.17, up 91.2% from Thursday.
Porter already owns a small portion of Citizens First stock, and the options deal would take that stake to 19.7%. According to its press release, Porter is now seeking to gain a 51% controlling stake.
The company said it will not exercise the option until it sure it can gain at least that much of an interest.
Catherine Mealor, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said in an interview Friday that she expects Porter to file a tender offer soon and, given the premium it is offering, she predicted it would succeed.
"The branch franchise fits perfectly in with them, so geographically the deal makes a lot of sense," Mealor said. "I also think they like its core deposits, which is something that Porter has been focused on for a while."
Citizens First has 11 branches in south central Kentucky, mostly in markets around Bowling Green. Those would complement Porter's 18 branches spread throughout Kentucky.
Mealor said that she was surprised by the $9 a share price tag, which is equal to Citizens First's book value.
But she said Porter likely felt it had to offer a high price to garner interest. "You have to incent the shareholders to tender," she said. "I think the price makes sense for a deal that is going to be immediately accretive."
Still, should all of the shareholders opt for cash, rather than stock in Porter, the $18 million hit would drop Porter's tangible common equity ratio to 5.5%, and the company would likely look to raise capital.
"I would still consider that an offensive raise, though," Mealor said.
Should the deal be completed, Jeffrey C. Gerrish, a partner at the law firm Gerrish McCreary Smith PC in Memphis, said Porter could face opposition among its new employees.
"They might be welcomed because the employees are happy to be working for a bigger company," Gerrish said. "But they also could encounter some soured employees from the way they did it."
But Mealor said that Porter's track record of integrating acquisitions — the company has completed seven deals since 1988 — lessens that risk.
"Porter has proven itself to be a successful integrator," she said. "They run an efficient and well-managed bank. I don't know what it is like at Citizens First, but I could see the employees of Citizens First benefiting from working for a company like Porter."
Frank Bonaventure Jr., a principal of the Ober Kaler law firm in Baltimore, which worked on a hostile deal that was ultimately unsuccessful earlier this decade, said regulatory approval is tougher to get on hostile takeovers because the buyer is typically basing its application on limited data.
"This is a heightened regulatory environment anyway, but those applications are viewed a little more closely than a normal merger application," Bonaventure said. "They are doable, just a little different."
Porter did say in its SEC filing that one of the conditions of the options agreement is its ability to access Citizens First's books and perform due diligence.