CapitalSource Inc.'s agreement to buy a Nebraska thrift is proceeding as planned, even though a sharp drop in the buyer's stock price over the summer would significantly lower the deal's value.
The Bethesda, Md., real estate investment trust announced in May that it planned to buy TierOne Corp. in Lincoln for $652 million in cash and stock.
TierOne has the right to terminate the deal without any penalty if CapitalSource's share price declines more than 15% from the date of the announcement and underperforms the Standard & Poor's 500 financial sector index by more than 15%.
Since the deal was announced CapitalSource's shares have dropped 28%, to $18.09 Friday, but the $3.4 billion-asset TierOne says it is undeterred.
"At this time, both TierOne and CapitalSource are committed to getting this merger completed," said Ed Swotek, a senior vice president at TierOne.
Falling stock prices have already done in one acquisition this quarter and factored into the break-up of another.
Analysts estimate that the drop in CapitalSource's share price has lowered the deal's value by roughly 24%.
Some analysts and shareholders have suggested that TierOne could renegotiate the deal before it closes next quarter. But they acknowledge that TierOne's bargaining power may be diminished by the recent news of its involvement with a troubled Florida mortgage broker.
John Delaney, CapitalSource's chief executive officer, said this month at a New York conference that his company, primarily a commercial lender, wants to turn TierOne into "a deposit-gathering machine" and use the deposits to fund loan growth. Such funding would be cheaper and more stable than using the capital markets.
The current challenges in the capital markets validate the decision to buy a thrift, he said. The spreads on three-month certificates of deposit have not changed, "despite the fact that we are in a massive liquidity and credit crisis."
TierOne's national commercial real estate lending business makes it "a good match" for CapitalSource, Mr. Delaney said.
Mr. Swotek said TierOne would keep its name and management but could offer more competitive pricing on deposits and expanded lending services for business customers as a wholly owned subsidiary of CapitalSource.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said that the deal would be a good one for CapitalSource.
"It is truly a strategic acquisition," he said. "That TierOne is in Nebraska, not in Bethesda, Maryland, is irrelevant."
Still, stock declines have torpedoed other deals.
Last month Security Bank Corp. of Macon, Ga., and First Commerce Community Bankshares Inc. in Douglasville called off their deal after Security's stock lost more than a fifth of its value. The $2.5 billion-asset Security had said in April that it would buy the $252 million-asset First Commerce for $57 million of stock and a one-time dividend of roughly $3 million.
Also last month, Community Trust Bancorp Inc. in Pikeville, Ky., lost out on its bid to buy Eagle Fidelity Inc. in Williamstown for $37 million in cash and stock after another buyer emerged with a higher, all-cash offer. Analysts speculated that Eagle accepted the cash offer from First Corbin Bancorp because Community Trust's stock price fell about 9% in the weeks after the deal was announced.
Theodore Kovaleff, an analyst at Sky Capital LLC, said he believes TierOne could potentially find a better deal, though it is unlikely to pursue one.
"The real question is whether or not TierOne is going to use some leverage to get a little bit of a sweetener," said Mr. Kovaleff, a TierOne shareholder.
How such a negotiation with CapitalSource would play out is uncertain, Mr. Kovaleff said, given TierOne's exposure to the Florida mortgage broker TransLand Financial Services Inc. and a related spike in its second-quarter nonperforming loans.
"CapitalSource could say, 'Well, when we got involved with you, we didn't know about this,' " he said.
TierOne and two other banking companies filed a petition last month attempting to force TransLand into involuntary bankruptcy.
TransLand had been servicing loans that it sold to TierOne and failed to remit $13 million of payments, according to a TierOne filing with the Securities and Exchange Commission.
TierOne said it uncovered evidence of fraud when it took over the servicing. It is insured for up to $7.5 million of losses from fraud by loan servicers, the company said, and it does not expect a material financial effect from the TransLand troubles.
For the second quarter, TierOne reported $42.3 million of nonperforming residential construction loans, mostly in Florida.
CapitalSource has said it remains comfortable with TierOne's loan portfolio.
