Midsize N.Y. Bank Finds Good Fit with Nearby Thrift

While the megamergers of Chemical with Manufacturers Hanover and NCNB with C&S/Sovran dominate the headlines, midsize banks like Long Island-based North Fork Bancorp are also finding opportunities for mergers and acqusitions despite continuing asset problems and tighter regulation.

North Fork's recent acquisition of Eastchester Financial Corp., a White Plains, N.Y., holding company, closed the second phase of its two-step plan to acquire thrifts with strong deposit bases.

Step one was North Fork's acquisition of Southold Savings Bank on Aug. 1, 1988. The Southold deal brought five branches to North Fork and nearly doubled the holding company's assets.

Southold also brought an attractive low-risk loan portfolio - primarily residential mortgage loans and mortgage-backed securities.

Step two of North Fork's expansion plan called for a return to the turbulent M&A market-place in search of a second thrift.

The Perfect Match

To find the perfect match, $1.7 billion-asset North Fork established criteria for size, location, asset composition, deposit composition, and pricing. One thrift stood out: Eastchester.

Easterchester had $506 million in assets, right in line with the target of $500 million. Geographically, it offered an enticing mix of diversity and economy; its offices in Rockland and Westchester counties would move North Fork's franchise off Long Island and onto the adjacent mainland, still close enough to consolidate some operations.

North Fork also found a good match on the books. Eastchester's $327 million loan portfolio, with $200 million in residential mortgage loans, posed no problems in light of their reserve levels. "We've been through that portfolio with a fine-tooth comb," said Frank J. Dell'Aglio, North Fork's chief financial officer. "We feel very comfortable with the acquisition."

Eastchester's deposit base, more than any other factor, made it perfect for North Fork. About 54% of Eastchester's $420 million deposit base consists of passbook, money market, and NOW accounts, Mr. Dell'Aglio said, leaving only 46% of the deposit base in certificates of deposit. That is a very favorable split, he said, when institutions with 65% of their deposit base in CDs are said to be doing well.

Deposits purchased from the Resolution Trust Corp., he added, typically consist of about 70% CDs.

Key Clause Inserted

North Fork's offered $79.5 million in cash ($20 per share), or about 1.02 times book value, when a definitive agreement was signed on April 19, 1990. However, since the agreement was signed before North Fork had adequate time for due diligence, a broad material-adverse-change clause was negotiated into the agreement, allowing North Fork to terminate the deal under certain conditions.

"We knew the economy was teetering," Mr. Dell'Aglio said, "so there was the possibility that [North Fork] could get worse."

When Eastchester reported a $2.1 million loss in the second quarter of 1990, North Fork announced on Aug. 10 that it was no longer interested in acquiring Eastchester at $20 per share. Eastchester's financial condition deteriorated further in 1990, with its nonperforming-assets-to-assets ratio rising to 5.55% and its loan-loss provision rising to $13.7 million during 1990.

Despite Eastchester's burgeoning asset quality problems, North Fork remained interested in acquiring the thrift and its deposit base. On Oct. 8, it announced a repriced agreement with Eastchester at $62 million in cash, or $15.50 per share.

North Fork Feels Recession

As North Fork and Eastchester awaited regulatory approvals on the deal, North Fork also began to show the effects of the recession, reporting a $12.4 million loss for the fourth quarter of 1990. With bank failures rising, regulators sought assurances that the acquisition of Eastchester would not push North Fork in that direction.

"It wasn't an easy process," Mr. Dell'Aglio said. "It is a cash deal in a time when regulators are looking at cash deals with a very jaundiced eye."

The key was to show regulators how the acquisition would strengthen North Fork by enhancing its liquidity and earnings and adding geographic diversity to its franchise.

Mr. Dell'Aglio said that showing regulators the sources of liquidity was not a problem, since liquidating assets was always part of the plan. North Fork has already liquidated about $85 million in assets and Eastchester had additional assets that could be liquidated quickly, including $137 million in federal funds and $50 million in an investment portfolio.

Equity Had to Be Raised

Despite the assurances provided, Fed approval was still contingent on North Fork's ability to raise $10 million in equity through the issuance of common stock, which when taken together with the asset shrinkage contemplated would maintain North Fork's strong capital position.

North Fork also had to commit to shrink the consolidated pro forma assets of North Fork and Eastchester to $1.8 billion within 90 days after completion of the deal.

Negotiations with regulators, although tough, did not taint Mr. Dell'Aglio's opinion of the process. "I think it was fair," he said. "Regulators tend to get smacked around [by] our industry. My reaction to the regulatory process has been a positive one. If the deal makes sense, I'm not fearful of dealing with the regulators."

For the time being, North Fork is not planning any more acquisitions.

"We'll have our platter full for the next year or so," Mr. Dell'Aglio said. But then North Fork intends to be in position to re-enter the M&A market. "The landscape is going to change so dramatically that the key is going to be keeping the gunpowder dry and positioning yourself."

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