Last decade's acquisitions made midsize banks an endangered species. Today's acquisitions are repopulating the category, and Tower Bancorp is a case in point.
After taking more than a year to complete the takeover of First Chester County Corp., the Harrisburg, Pa., company is again hunting in-market acquisitions. That effort kicked off Dec. 20, when Tower restocked its war chest with $51.2 million of fresh capital.
Tower, led by Chief Executive Andrew Samuel, belongs to an emerging group of banks that are filling a void in the $1 billion- to $10 billion-asset range.
"Buyers cleared that group out," said Jeff Marsico, an executive vice president at Kafafian Group in Parsippany, N.J., which advises Tower. "And folks like Andrew Samuel are refilling that category."
Other members of that new middle tier of community banks include Provident New York Bancorp in Montebello, N.Y., Sandy Spring Bancorp in Olney, Md., and National Penn Bancshares in Boyertown, Pa., Marsico said.
Samuel made it clear in an interview that Tower has rejoined the acquisition trail.
"We're a well-capitalized company, but we really see opportunities out there to grow organically … as well as strategic opportunities," he said. "And we wanted to make sure that we had the firepower to be in a position to take advantage."
Analysts say Tower's public offering would also help shore up its capital ratios after the First Chester purchase increased its assets by 40%, to $2.7 billion. Samuel said Tower has plenty of capital to absorb First Chester, and is ready to do another deal. "We're always talking to potential partners," he said.
Tower seeks targets in the $300 million- to $1 billion-asset range within a two-hour drive from Harrisburg in any direction.
Samuel called that the "sphere of influence" of the management team, where potential partners are most likely to be familiar with the company and its culture.
Tower officials are calling on smaller banks that might make good partners, he said.
"We believe [in] the external climate, particularly with all the regulatory pressures and the economy, we've really positioned ourselves as a great partner for a lot of smaller community banks," Samuel said. "The ability to partner with us — and I don't use that term 'partner' loosely — to really create a company with some scale that can compete" will appeal to prospective sellers.
Marsico cautioned that as Tower gets larger, its ability to double its size again diminishes. Still, there are plenty of smaller banks that would be good add-ons to Tower's network.
Tower has also been growing organically at a fast clip, said Whitney Young, an analyst at Raymond James & Associates. She said it has expanded the commercial portfolio and boosted market share by bringing on customers from competitors. Young said she would like to see Tower do more deals but would prefer it first demonstrate it has properly digested First Chester.
"It would be nice to see a couple of quarters of strong earnings to show that they can absorb this bank successfully," Young said. "Still, I wouldn't be surprised if they announced another deal within the next 12 months."
There are opportunities aplenty in the company's market, analysts said. "For a while now, we have been citing Pennsylvania as one of the most overbanked markets in the country," said Collyn Gilbert, an analyst at Stifel, Nicolaus & Co. Inc. "So they're in a position to be able to consolidate kind of the smaller-tier companies."
But closing the next deal won't be easy, as Tower knows firsthand.
Regulators have more thoroughly scrutinized deals that involve a struggling seller, and a handful were recently called off after regulators indicated they would not approve the transactions. Some analysts had wondered if the First Chester acquisition would ever come together.
Jason O'Donnell, an analyst at Boenning & Scattergood Inc., said Tower was wise to wait on a capital raise until after the transaction closed, as investors may have been reluctant to add more capital if Tower did not end up needing it.
"Regulators are putting the kibosh on deals left and right," O'Donnell said. "Now that it's been completed, I think clearly now is the best time to move forward and execute a raise, particularly in light of the fact that the stock has run up."
Samuel said that regulators had approved the acquisition but the transaction was delayed when First Chester was forced to restate its earnings and entered into an enforcement agreement.
Despite the slog to close the deal, Samuel said Tower has no regrets about the year it spent waiting for it to come together. And it isn't scared off by the potential grilling it may get from regulators on its next acquisition attempt.
"We work very hard at having a solid relationship with our regulators," Samuel said. "So I think that as long as we have a solid relationship, and the deal makes sense for everyone involved, I believe that the regulators will be supportive."