National Penn Bancshares (NPBC) in Allentown, Pa., spent years searching for the right deal before agreeing to pay up for a bank that meets all of its needs.

The $8.6 billion-asset National Penn is putting some of its large cash hoard to use with its first acquisition since the financial crisis, agreeing Wednesday to buy TF Financial (THRD) in Newtown, Pa., for $138 million in cash and stock.

For a self-described disciplined acquirer like National Penn – which dropped out of the First Mariner bankruptcy auction in April – the agreement represents a turn from the bargain rack to luxury shopping. The deal values TF Financial at 144% of its tangible book value.

"We’ve been very disciplined in our acquisitions strategy," says Scott Fainor, National Penn’s chief executive. “We’ve been looking for the right transaction and this is it.”

Acquisitions make sense for National Penn for two reasons: the company has lot of capital and is based in a slow-growth market in eastern Pennsylvania. It has had a Tier 1 ratio of more than 10% for the past several years, as well as a stock that has been trading at a strong multiple to earnings.

Nonetheless, National Penn took its time getting a deal done. It took a hard hit during the crisis and spent years recovering, ultimately returning to health in part through a $150 million cash infusion from private equity firm Warburg Pincus. It’s been actively looking for a deal for about two years, but has been getting the pieces in place for an acquisition since Fainor became CEO in January 2010.

"We’ve been talking about our acquisition strategy for several years, while strengthening our  balance sheet, reducing problem assets and getting all the fundamentals in place," Fainor says.

The years-long preparation period also reflects National Penn’s cautious approach to M&A, says Keefe Bruyette & Woods analyst Damon Delmonte.

"The fact that they haven’t been able to execute [on a deal] probably reflects the fact that management has been cautious about overpaying," Delmonte adds. "They’re not going to force it and get a deal done for the sake of getting a deal done."

TF Financial is on the opposite end of the spectrum from National Penn’s last target, First Mariner Bank in Baltimore. While the First Mariner bidding represented a chance to buy a distressed bank at a discount and gain access to the high-growth Washington, D.C., area, TF Financial is by and large a traditional in-market deal that’s based on cost savings. Fainor says he should be able to cut 40% of TF Financial’s annual costs by, among other things, closing two overlapping branches.

The deal would also represent National Penn’s most significant expansion outside its home state, giving it seven branches in New Jersey. National Penn has 110 branches in its home state and one in Maryland.

Analysts view the deal as a sensible way for National Penn to put its cash to use, and a necessary geographic expansion. The New Jersey counties are not particularly high-growth, but "it’s hard to get into a slower-growth market" than National Penn’s core, and they offer "a new platform for balance sheet growth," says Anthony Polini, an analyst at Raymond James.

One potential concern is that the deal accelerates National Penn’s march toward $10 billion in assets, a red line where banks face caps on interchange fees and added regulatory scrutiny.

The threshold doesn’t worry Fainor.  "I’m not going to sit here and say there won’t be additional expenses for regulatory processes – there will be. But we will be prepared for that," he says.

The acquisition may just whet National Penn’s appetite for more deals. Matthew Kelley, an analyst at Sterne Agee, says that, after the deal closes, National Penn will still about $125 million in capital to pursue more acquisitions.

"When a bank decides that it’s time for them to find a partner, we’re here," Fainor says.



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