Sometimes the best deal is the one that doesn't happen.
That appears to be the case for Sterling Bancshares Inc. in Houston, which announced this week that it had called off its 19-branch deal with First Banks Inc. The sale was set to close by Dec. 31.
First Banks, of St. Louis, had planned to sell its Texas branches, with $500 million of deposits and $230 million of loans, for $30 million, or a 6% premium on deposits. Analysts said the premium would have been lower had it been priced today.
Those who follow the $4.9 billion-asset Sterling said the cancellation relieves it of overpaying for branches in the deal, which was announced and priced in August. Sterling also benefits from taking a dilutive capital-raising effort off the table.
"It's a net positive," said Brett Rabatin, an analyst with Sterne, Agee & Leach Inc. "I think it would have been a nice deal for Sterling, but if you are thinking about the people who own the stock, the question was going to be after the fourth quarter, would there be another capital raise. This cancellation alleviates concerns about that."
Jefferson Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed that it was in Sterling's best interest to call off the deal. "In our opinion, we view the termination as neutral to slightly positive," he wrote in a note to investors.
Terry McEvoy, an analyst for Oppenheimer & Co., wrote in a report that the deal would have reduced Sterling's tangible common equity by 100 basis points.
Neither Sterling nor First Banks returned calls seeking comment. In a joint statement, Terrance M. McCarthy, the president and chief executive of First Banks, and J. Downey Bridgwater, Sterling's chairman, president and CEO, said, "While we believe this transaction could still be beneficial to both companies, the current environment has made obtaining regulatory approval a longer than anticipated process, and we have reached the point where it is in the best interest of both our franchises to terminate the agreement and proceed forward."
In May, Sterling raised $54.8 million through a common equity offering. It has repaid its $126.6 million investment from the Treasury Department's Troubled Asset Relief Program but still has outstanding warrants.
Sterling restated its third-quarter results because of loan problems. It increased its initial third-quarter loan provision by $28.6 million, bringing the total provision to $56.1 million. That increased the loss for the quarter from $6.1 million as initially reported to $24.1 million.
For First Banks, which has been selling off its holdings in pieces to boost capital ratios after losing $566 million in the past seven quarters, the deal's collapse poses problems. Construction and development loan portfolios in Florida and California have made up the bulk of the losses.
First Banks' subsidiary is operating under a regulatory agreement requiring a Tier 1 risk-based ratio of 7%. At the end of the third quarter, the subsidiary was in compliance with the agreement, with a ratio of 8.91%. Total risk-based capital stood at 10.19%.
The $10.7 billion-asset First Banks announced in November that it would sell its 24 Chicago branches, along with $1.2 billion of deposits and $315 million of loans, to FirstMerit Corp. in Akron. The sale was expected to improve risk-based capital levels by $75 million. In September, First Banks sold its insurance unit for $14.8 million.
Despite regulatory delays for deals these days, industry watchers said First Banks will likely find another buyer for its Texas franchise.
"They will have the opportunity to sell them again," said Bob Walters, the chairman of Bank Advisory Group, an investment banking firm in Austin. "There will be plenty of interest, assuming they are traditional community bank-type branches with a fairly typical deposit mix."
Yet this remains a tricky environment for community bank deals, with several companies delaying or calling off deals, often blaming regulators. Through Dec. 16, 26 bank and thrift deals had been terminated this year, or 22.1% of the 118 deals announced through that date, according to data from SNL Financial LC.
Still, industry watchers questioned why Sterling and First Banks didn't just extend the deadline to complete the deal. "The real question is why did it not happen," Walters said. "What happened? They obviously had an interest in them. What is it about Sterling preventing them from getting regulatory approval?"
Walters said that in a less depressed banking environment, a deal often is delayed because the buyer turned up something during the due diligence process that gave it pause. But in a branch banking deal, the buyer typically thoroughly vets the loan portfolio before signing the initial agreement.
Walters said the deal most likely was called off because regulators were not comfortable allowing Sterling to complete the purchase. Still, with regulators being stretched thin these days, analysts said delays in approval should not be cast in too negative of a light.
"While some investors will question if there is something to read in the lack of state, FDIC, and Fed approval, we note the regulator review occurred last quarter (which partially led to the restatement of earnings)," Rabatin wrote in a note on the deal's termination. "In our view the 'shoe to drop' of regulator pressure and a reduction in the cash dividend is in the past."
