The deal that Oritani Financial Corp. announced Wednesday for Greater Community Bancorp would give the Washington Township, N.J., thrift company more core funding, more commercial banking expertise, and more branches in counties where it already operates.
Buying the $981 million-asset Greater Community, of Totowa, also would put to work excess capital that Oritani has had since it sold 30% of its stock in an initial public offering in January.
Yet investors in the $1.2 billion-asset Oritani, one of the highest-performing mutual holding companies in return on assets, punished the stock after the $187 million deal was announced. Though it is common for acquirers' shares to slip, Oritani's were down more than 13% late Wednesday, to $14.83. The plunge came the day after the stock had hit a record high.
Mike Shafir, an analyst at Sterne, Agee & Leach Inc., explained that even though "strategically the transaction makes sense," it would dilute Oritani's projected tangible book value in a full conversion, a key metric for investors in mutual holding companies. He would not estimate the amount of dilution, saying it would vary depending on the assumptions used.
"When a company is in the mutual holding company structure, a lot of the value in the shares comes from what that company could look like if it was fully public," Mr. Shafir said. "In the case of Oritani - which is actually very profitable compared to its peers from an earnings perspective - there was a significant amount of accretion to tangible book if the company decided to undergo a second-step transaction."
Oritani said it agreed to pay $21.40 for each Greater Community share, or a 48.6% premium over Tuesday's closing price. Greater Community's stock shot up nearly 40% by late Wednesday, to $20.06.
The price works out to 34.5 times Greater Community's earnings over the last 12 months, 3.12 times tangible book value, and an 18.6% premium on core deposits, Mr. Shafir said.
Kevin J. Lynch, Oritani's chairman, president, and chief executive, said it had been looking for an acquisition since January but turned down three or four prospective sellers "because we just didn't like their numbers."
Though Greater Community was not looking to sell itself, Oritani modeled many publicly traded banking companies in its home state to find a potential match, and that one stood out, Mr. Lynch said.
"It's just a perfect fit for us," he said. "This transaction has allowed us to get more into the commercial arena, both on the lending side and deposit side. That's really key to us to help us grow."
He also said absorbing Greater Community would reduce Oritani's ratio of certificates of deposit to total deposits by a third, to 40%. "The balance sheet needed to be changed to focus more on core deposits."
The deal price would be paid 60% in stock and 40% in cash. After the transaction is complete, 42% of Oritani's stock would be outstanding, Mr. Lynch said. Its mutual holding company would continue to hold a majority stake.
By deploying excess capital, the acquisition would allow Oritani to consider pursuing a second-step stock offering to go fully public "far sooner" than it would have otherwise, Mr. Lynch said. The company has not decided when an offering would take place, but it will happen "when we get our sea legs."
A second-step conversion could have been a decade or more off if Oritani grew organically without an acquisition, Mr. Lynch said.
Mr. Shafir said the acquisition would reduce Oritani's tangible capital ratio from 22.4% to about 12%, "so there's still excess capital there." He said a typical ratio for a fully leveraged company would be about 7%.
Oritani said Greater Community Bank would be merged into its Oritani Savings Bank, which would be renamed Oritani Community Bank.
The acquisition is expected to be 20% accretive to Oritani Financial's fiscal 2009 earnings - which Mr. Lynch said should help the stock rebound from its sell-off.
"People are taking the short view with the reduction in our tangible net worth," he said. "Yes, it did reduce our tangible net worth, but it greatly increases our earnings. It's also going to reduce our capital, put it to work, and get a fair return."
The estimated earnings accretion includes some cost savings, Mr. Lynch said, but he could not immediately say how much of Greater Community Bancorp's expenses would be cut.
No branches would be closed, he said. Greater Community has 15 in Bergen, Passaic, and Morris counties, while Oritani has 18 branches in Bergen, Passaic, and Hudson counties, plus its main office. (Three additional branches are being built.)
The deal is expected to close in Oritani's fiscal fourth quarter, which ends June 30. Anthony M. Bruno, Greater Community's chairman, president, and CEO, would stay on only until the closing.
