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Steuben Trust in Hornell, N.Y., is proof that mergers of equals are easier said than done, especially for closely held banks.

The $580 million-asset bank pursued a pair of MOEs before switching gears and agreeing on Oct. 21 to be sold to the $11.6 billion-asset Community Bank System in DeWitt, N.Y., according to a regulatory filing tied to the companies’ $106.8 million merger agreement.

Several factors led it to abandon the MOE efforts, including a decline in one of the potential merger partner’s stock price, transaction costs that exceeded projections and Steuben's relatively illiquid stock.

Steuben decided in mid-2017 to take a serious look at M&A, when directors realized they would need to make sizable investments in technology and cybersecurity to remain relevant. The bank’s core processing agreement was set to expire at the end of 2019, and it faced termination expenses if it were sold after renewing the contract.

Margin pressures, an aging shareholder base and the fact that the bank’s top two executives were nearing retirement added to the urgency to pursue a deal.

“Addressing each of the foregoing challenges while remaining an independent community bank represented significant execution risk to Steuben, its continued profitability and its stock price,” the filing said.

Brenda Copeland, Steuben’s CEO, met with the leader of a New York community bank in April 2017 to discuss a merger of equals. They considered how an MOE could address succession planning challenges at their banks and create economies of scale, the filing said.

The parties entered into a confidentiality agreement in August 2017. In January 2018, the unnamed bank proposed an all-stock deal that would have priced Steuben at roughly 150% of its tangible book value.

But that bank ended talks two months later, citing downward pressure on its stock price.

In June 2018, Steuben asked another New York bank if it had any interest in a merger of equals. But that bank was advised by its investment bank that Steuben “would not provide adequate liquidity” for its shareholders.

The original MOE prospect returned in October 2018 with an offer that was 3% lower than what it had proposed earlier in the year. The banks signed a formal letter of intent on Dec. 18, 2018, leading to a period of “extensive due diligence,” the filing said.

Another snag surfaced in February, when the potential partner determined that its transaction costs would be materially greater than it originally expected. Steuben decided in mid-March to terminate discussions with the bank.

Steuben mulled a completely different route, holding discussions in May and June with a possible acquisition target. But Steuben’s lack of a highly liquid stock, and an inability to offer enough cash to the potential seller, complicated matters.

Community Bank System first expressed interest in buying Steuben in July, the filing said.

During a July 24 meeting, Mark Tryniski, Community Bank System’s president and CEO, indicated that his company could pay $63 a share, with three-fourths of that in stock, for Steuben.

Steuben persuaded Community Bank System to increase the stock portion to 80% of the total consideration. A letter of intent was submitted on Aug. 9, and a 60-day exclusivity period began a week later.

Steuben’s board unanimously approved the merger on Oct. 17. The deal, which was announced four days later, is expected to close in the second quarter. It priced Steuben at 167% of its tangible book value.

The acquisition “will enhance and extend our banking footprint in western New York, in markets which we successfully compete in and aspire to continue to grow,” Tryniski said in a press release. “Our move to establish a broader and deeper banking presence in this region is reflective of these growth objectives.”

Community Bank System expects the deal to be accretive to its earnings in the first year, excluding merger-related expenses. The deal should be immediately accretive to Community Bank System’s tangible book value.

Community Bank System expects to incur $6.5 million to $7.3 million in merger-related expenses. It plans to cut 30% of Steuben’s annual noninterest expense.

Community Bank System agreed to pay up to $1.3 million in retention bonuses to six Steuben executives, including Copeland, if they stay at Steuben until the deal closes. Copeland’s payout will be $960,000, the filing said.

Copeland also agreed to join Community Bank System as a business development and retention executive. She will receive a $500,000 cash bonus and a $130,000 annual base salary as part of the 13-month agreement. She also agreed to a 12-month noncompete clause and a two-year agreement to refrain from recruiting former Steuben employees and clients.

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