National Penn Bancshares of Boyertown, Pa., struck its largest deal ever Friday, when it said it would buy the $2.9 billion-asset KNBT Bancorp in Bethlehem for $464.6 million in stock.
The deal, which Glenn E. Moyer, National Penn's president and chief executive, called "transformative," would increase its asset size by nearly half, to $8.5 billion, making it the fifth-largest banking company in the state. It also would boost National Penn's deposit share in some of the state's most attractive markets.
In a conference call Friday, Mr. Moyer said that scale has become more important as bankers continue to wrestle with shrinking margins amid increased competition for loans and deposits. "We don't need to tell anyone on this call of the challenges facing our industry today," Mr. Moyer said.
The deal is the sixth announced this year in which one Pennsylvania banking company agreed to buy another, according to SNL Financial LC. It continues the consolidation in a state many industry observers have called overbanked.
National Penn has been an active acquirer this decade, buying five banks and a thrift. It also has a deal pending. In June it announced an agreement to buy the $166 million-asset Christiana Bank and Trust in Greenville, Del.
KNBT is the parent company of Keystone Nazareth Bank and Trust Co., which has 56 branches and $2 billion of deposits in six counties: Lehigh, Northampton, Carbon, Luzerne, Schuylkill, and Monroe.
The KNBT branches would continue to operate under their own name. National Penn's branches in Lehigh and Northampton counties would switch to the KNBT name.
Mr. Moyer said that National Penn would gain deposit share in counties it considers attractive. It would leap to the top share in Northampton County, with 22.3% of the $991 million of deposits there. It also would rank No. 2 in Lehigh County.
In addition, once the KNBT and Christiana deals close, National Penn's assets under management and administration would increase by 148%, to $6.7 billion.
Mr. Moyer said that the overall loan portfolio would not change much, but that National Penn would benefit from the relatively lower cost of KNBT's deposits.
Scott V. Fainor, KNBT's president and CEO, said the deal allows for "margin maximization," since National Penn could use those deposits to make more commercial loans.
The deal is expected to close in the first quarter. Mr. Moyer would remain National Penn's president and CEO and the chairman of its National Penn Bank. Mr. Fainor would become the chief operating officer of the parent company and the president and CEO of the bank.
Asked during the conference call why KNBT negotiated exclusively with National Penn instead of entertaining other bids, Mr. Fainor said: "This is a strategic merger. We are building value for our shareholders." KNBT shareholders would get a 35% stake in National Penn, which has "tremendous upside potential."
Matthew Schultheis, an analyst at Ferris, Baker Watts Inc., said that the deal makes sense for National Penn strategically, but that he understands why KNBT shareholders might be "a little frustrated."
According to Mr. Schultheis, the price works out to 23 times trailing 12 months earnings and a 13.8% core deposit ratio, which "shocked" him. He said he would have expected KNBT to get a ratio of 20%.
"Looking at it from the core deposit premium, it's a steal for National Penn," he said. "It clearly got priced off earnings."
But he said the combination sets up a potentially bigger deal later. "Anytime you can build a decent franchise in good markets, eventually someone will want you. If you're looking to double dip, this is the way to do it."
The deal values each KNBT share at $17.31, a 20% premium over the stock's closing price Thursday. It rose 6.5% after the announcement, to close at $15.30 a share. National Penn's shares fell 8.5%, to $15.38.
The deal is expected to be accretive to National Penn's earnings and tangible book value next year. It estimated its internal rate of return on the deal at 16.1%, well in excess of its cost of equity.
The total operating expenses of the two companies would decrease by 12.1%, or $26.2 million, within two years.
Six overlapping branches would be consolidated, to save $1.15 million. But the bulk of the savings, $11.5 million, would come from reducing the number of employees.
