Tower Bancorp Inc. in Harrisburg, Pa., doesn't mind taking on the problem assets of First Chester County Corp., but it wants no part of its mortgage business.
The $1.4 billion-asset Tower is requesting that First Chester try its best to sell its American Home Bank mortgage unit at or before their deal closes, according to an amendment to the agreement the companies filed this week.
"This is a tremendous business that has worked really well for us, but Tower doesn't want to operate a large mortgage business so we are spinning it out," John A. Featherman 3rd, chairman, president and chief executive of the $1.3 billion-asset First Chester, said in an interview Thursday.
"It is not a contingency of the deal, but they want us to try to sell it," Featherman said.
Analysts said First Chester is driven to oblige, as Tower is the struggling company's lifeline. Making such a change to an agreement, though, shows how banks are becoming more flexible in crafting deals these days.
"It used to be that a company would slap a multiple of earnings on a deal and if the seller liked it, it would happen," said Matthew Schultheis, an analyst at Boenning & Scattergood Inc. "Now, you have to be fluid if you want to get things done."
Tower did not return a call seeking comment.
Analysts said the agreement to shed the mortgage unit makes an attractive deal even better for Tower. "Tower's focus is on building relationships, particularly in the middle market, and the mortgage business adds nothing to that," said Anthony Polini of Raymond James & Associates.
The deal was announced in December, with Tower expected to pay $65 million in stock for First Chester, or 90% of its tangible book value. The agreement includes a provision that the purchase price will drop if First Chester's credit quality worsens by the time the sale closes.
On Dec. 31, First National Bank of Chester County had noncurrent loans of $15.4 million, up 35% from a year earlier, according to data from the Federal Deposit Insurance Corp.
The deal was struck through a bid process as First Chester was racing to satisfy a Dec. 31 capital requirement laid out in a memorandum of understanding with the Office of the Comptroller of the Currency.
After Tower's purchase of $100 million in loans from First Chester and extension of a $26 million line of credit, First Chester's bank was considered well capitalized as of Dec. 31. Yet after the process, Featherman said Tower realized it didn't want the mortgage arm.
"The deal came together so quickly," said Featherman, who would become Tower's vice chairman. "But when they went back to look after the deal was put together, they said they just didn't want that piece."
First Chester bought the mortgage unit in January 2009 for $14 million. Featherman said it has performed well, originating $2.5 billion in mortgages last year. Yet Featherman and analysts said mortgage banks are a tough business for community banks.
Featherman said the unit has a good reputation that should aid in its sale. Though the companies built into the amendment a $2 million loan that would shore up First Chester's regulatory capital ratios in the event it books a loss on the sale, analysts said First Chester could end up with a gain.
"They bought it at absolutely the right time, so they got it for cheap, so I think they should be able to make a gain on the sale," Schultheis said.
He added that regulators may have pushed for the separate sale of the mortgage unit because of pressure that originations put on First Chester's capital. Featherman, though, said the unit's sale came at Tower's request.
Tower is embarking on a strategy to build a large community bank focused on commercial lending. The First Chester deal would double Tower's size.
Graystone Financial Corp. bought Tower last year, with the Tower brand surviving. Andrew S. Samuel, Tower's chairman and CEO, has said in past interviews that growth remained a priority.
Polini said he looks forward to another deal by Tower. "So far the deals have been great," he said. "So I am waiting for the next one."