Its drive for an industrial loan charter stalled, the commercial lender CapitalSource Inc. of Chevy Chase, Md., found a new route to diversifying its funding: buying a Nebraska thrift.
The $15.7 billion-asset company said Friday that it has agreed to acquire TierOne Corp., a $3.4 billion-asset thrift in Lincoln, for $652 million. It is the third company to look elsewhere after being caught in the regulatory knot over ILCs.
CapitalSource chief executive John Delaney said in a conference call with analysts and investors that he plans to use TierOne's low-cost deposits to fuel CapitalSource's loan growth. The thrift in turn would benefit from CapitalSource's higher-yielding assets, he said.
"The optimization of these combined balance sheets is an enormous opportunity for us," Mr. Delaney said. "But I think it's safe to assume that we're assuming that that opportunity comes in over time, not initially."
Asked whether more deals are in the works, he said: "The short answer is, no. We think TierOne has a terrific franchise and we plan on investing in this franchise and growing this franchise, and we think there are ways we can do that as it serves the needs of CapitalSource without having to necessarily pursue additional acquisitions."
CapitalSource, a real estate investment trust, focuses on middle-market commercial lending in health care, structured finance, asset-based lending, and senior and subordinate loans through syndication. Its loan book rose 35.8% in the first quarter, to $8.5 billion, financed mainly through debt and repurchase agreements.
The deal values TierOne's shares at $34.46, 36.8% above Thursday's closing price. CapitalSource shares closed down 2.4% Friday.
TierOne is to keep its name as CapitalSource's thrift subsidiary, and its organizational structure would remain intact. "They will be able to continue their local identity, which is something that's very important to them and very important to us," said Thomas A. Fink, CapitalSource's chief financial officer.
TierOne CEO Gil Lundstrom would remain at the helm of the thrift and join the CapitalSource board.
CapitalSource combed through a list of "thousands" of FDIC-insured institutions, and TierOne came up "as a perfect match," Mr. Fink said.
TierOne's first-quarter profit rose 1.9% from a year earlier, to $9.4 million. CapitalSource reported a 17.5% increase, to $78.7 million.
TierOne "lays a solid foundation for our continued growth," Mr. Delaney said.
Mr. Fink called the thrift a good fit because of its size and profitability, and because it came at a price "we could afford."
He also noted TierOne's $3 billion loan book; 23% are consumer loans while the rest are construction, commercial real estate, and business loans. "It helps us grow and diversify assets," Mr. Fink said.
Asked why his company chose Nebraska, a state not widely considered a desirable banking market, the CFO said: "Why not? It's a great part of the country. It's not the largest market, but it doesn't have to be. TierOne is a nice-sized institution and we think there is opportunity to grow the deposits."
TierOne has 69 branches and a 5.3% share of the Nebraska deposit market, ranking fourth behind Lauritzen Corp.'s First National Bank of Omaha, with 15.2% of deposits, Wells Fargo & Co. , and U.S. Bancorp.
"That's what was available," is how Jeffrey P. Davis, an analyst with First Horizon National Corp.'s FTN Midwest Securities Corp., summed up CapitalSource's selection process. "They were trying to find a funding vehicle, and they found one."
Mr. Fink said CapitalSource has no game plan yet for expanding the thrift, and no growth targets. But Mr. Delaney said CapitalSource's backing will allow TierOne to be more aggressive in pricing deposits.
Under the Federal Deposit Insurance Corp.'s definition, 87% of TierOne's deposits are core deposits. "The thrift can raise money at around 5%. That is about 100 basis points below what it costs CapitalSource," Mr. Davis said.
"The deal makes a lot of strategic sense," he said, but investors need to realize that it will take time for the buyer to take advantage of the balance-sheet synergies.
Perhaps mindful of CapitalSource's run-in with the FDIC over its ILC charter, its executives were careful in their dealings with their prospective regulator, the Office of Thrift Supervision. Mr. Delaney repeatedly referred to the relationship as "respectful and deferential."
"We did spend a decent amount of time talking to them, sharing information not only about capital but how this would work and how we would work together and how we would partner and how we would integrate assets in the balance sheet," he said of the OTS negotiations. "And I think the results of those conversations were very positive."
Still, the integration will be complicated, and Mr. Delaney said he is in no rush to make decisions about which assets end up on the holding company's balance sheet of the holding company and which will be with the thrift subsidiary.
CapitalSource's June 2005 application to start a Utah industrial loan company was sidelined by a political firestorm over letting retailers such as Wal-Mart Stores Inc. into the banking business.
The FDIC tabled all applications in the wake of the criticism. After months of waiting, CapitalSource was finally approved in March, but the agency attached a string of conditions including requiring CapitalSource to shed investments that were commercial in nature and barring investors who had significant holdings in both CapitalSource and commercial firms from being involved with the proposed ILC.
The two other companies - NHB Holdings Inc., a specialized lender, and Blue Cross Blue Shield Association - abandoned applications for an ILC and took other routes. "We view the TierOne acquisition as an even better first step for us, primarily because of the retail branch network," Mr. Fink said.
Still, he did not rule out another run at an ILC, saying the two are not "mutually exclusive."
Mr. Delaney said he is confident the OTS will approve the deal.
"It would not be prudent of us to be announcing a transaction like this unless we thought the likelihood of it getting accepted by the regulators was high," he said.
