With its deal for Community Banks Inc., Susquehanna Bancshares Inc. in Lititz, Pa., would absorb a longtime competitor and gain significant scale in markets where growth has been hard to come by.
The $8.2 billion-asset Susquehanna said Tuesday that it would buy the $3.8 billion-asset Community Banks, a Harrisburg, Pa., company, for $860 million in stock and cash.
The deal, by far its largest ever, would more than double Susquehanna's deposits in its home state and expand its presence in Maryland. William J. Reuter, Susquehanna's chairman, president, and chief executive officer, said in an interview Tuesday that this one deal lets his company achieve growth targets it otherwise might have taken five years to reach.
"This is a wonderful opportunity for us to increase market share and deliver better shareholder value [in the] long term," Mr. Reuter said.
Pennsylvania is one of the nation's slowest-growing states and, as a result, is widely viewed as ripe for consolidation. Like many of their competitors, Community Banks and Susquehanna reported slow organic loan and deposit growth in the first quarter though Susquehanna's overall results were boosted by its April 2006 purchase of a New Jersey bank.
Mr. Reuter said Community Banks initiated the merger talks and that Susquehanna moved quickly not only to eliminate a competitor but also to block other competitors whether in-state or out from getting Community, which has 80 branches in Pennsylvania and Maryland.
Susquehanna, with 163 branches in Pennsylvania, New Jersey, and Maryland, has been especially eager to bulk up in York and Lancaster counties in its home state. The company's market share in York County would jump from 2.9% to 13.8%, the No. 2 ranking, and it would vault to No. 1 in Lancaster County, where its market share would rise from 13.1% to 19.9%.
"I'd like to emphasize that these are core markets for us, markets we know, markets we grew up in," Mr. Reuter said. "It's not a reach into another state or a place where we're not familiar with business."
Susquehanna had also been looking to expand into Adams County, and its deal for Community Banks would give it the No. 4 market-share position there, with 11.4% of deposits.
Both Susquehanna and Community Banks have been active buyers. Susquehanna has bought 32 companies since 1982, and Community has bought 13 since 2001, including two on April 1, East Prospect State Bank in Pennsylvania and Bucs Federal Bank in Owings Mills, Md.
Mr. Reuter said Susquehanna probably would not buy another banking company for 12 to 16 months, though it would continue to seek wealth management deals.
In a conference call Tuesday, he touted the low execution risk of combining two companies with such expertise in integration. He also said the companies use the same operating system, minimizing the possible impact on employees and customers.
The deal calls for each Community Banks share to be exchanged for either 1.48 Susquehanna share or $34 in cash a 44% premium to Community's Monday closing price of $23.63 a share.
Community Banks' shares soared on news of the deal, closing Tuesday at $32.12, up 35.93%. Susquehanna's shares fell 1.93%, to close at $21.85.
Collyn Gilbert, an analyst at Stifel, Nicolaus & Co., wrote in a research note: "A 44% premium in an environment where bank fundamentals are deteriorating and valuations are lofty gives us pause.
"We believe this reflects a dire need for growth, further reflecting our belief that the opportunities for Susquehanna, on a stand-alone organic basis, are somewhat limited."
Drew K. Hostetter, Susquehanna's chief financial officer, said in the conference call that the deal should be accretive to 2008 earnings by 4%. Susquehanna's tangible book value per share would be diluted by about 26%, he said, but the company should earn this back within four years.
The deal price is equal to about 1.63 times Community Bank's book value, compared to a median of 2.5 times book for similar deals, Susquehanna said.
"It's a good deal for Community's shareholders," said Matthew Schultheis, an analyst at Ferris, Baker Watts Inc. who follows both companies. "I'm going to say it's probably neutral for Susquehanna's shareholders."
Susquehanna said it expects to achieve 35% cost savings, about $33 million, mainly by trimming redundant back-office jobs. It said the estimate is conservative because it does not include possible branch closings, and 22 Susquehanna and Community branches are within two miles of each other.
Mr. Schultheis said he thinks Susquehanna is overly optimistic about the potential for cost cuts and revenue increases, though the combination does promise benefits.
Eddie. L. Dunklebarger, Community's chairman, president, and CEO, is to become Susquehanna's vice chairman. Jeffrey M. Seibert, who heads Community's banking division, would join Susquehanna's Pennsylvania bank as chief operating officer.
Community said April 18 that it had elected for early adoption of FAS 159, a controversial accounting standard that several banking companies have implemented in connection with bond-portfolio restructurings. But several analysts said the decision is unlikely to have an impact on the merger.
At the time it adopted the standard, Community said it applied fair-value accounting to $150 million of securities formerly in its available-for-sale portfolio; it subsequently sold them and reinvested the proceeds in higher-yielding securities. The move resulted in a $3.1 million reduction of shareholders' equity but did not affect income.
The Securities and Exchange Commission has signaled that it is scrutinizing restructurings undertaken under the new standard, and a handful of companies have reversed their adoption of it and recognized charges in doing so. Community's exposure is relatively small.
"Even if the SEC decides it hasn't been adopted properly, and it has to be reversed out of earnings, it is to some extent a moot point by then," said Frank Schiraldi, an analyst at Sandler O'Neill & Partners LP.
