Pennsylvania Bank Makes Case for Selective M&A

CNB Financial is a builder that is trying its hand at being a buyer.

The Clearfield, Pa., company (CCNE) this week announced a $40.4 million agreement for FC Banc Corp (FCBZ) near Columbus, Ohio — its first deal since 1999.

CNB, at $1.8 billion of assets, wanted to expand into a new market and decided to buy the $367 million-asset FC instead of taking the startup route, CNB Chief Executive Joseph B. Bower Jr. told analysts Wednesday.

However, he cautioned at the outset of the conference call that CNB does not plan to become a serial acquirer.

"Normally what we have done is grow through organic growth" and present CNB as an alternative to big banks, he said. "Small to midsize businesses are our approach, and we still believe that there's a fair amount of growth available in the markets that we currently reside in. That being said, as we looked at this transaction … we felt that it gave us all the same opportunities that we always looked at."

In fact, company executives plan to draw on their experience with a de novo expansion into Erie, Pa., in 2005 as guide for how to build up their new Ohio market.

"We started with zero deposits [in Erie] and we were the bottom of the market … Now we're No. 5 [in market share], almost No. 4," Bower said. "Taking that same model and landing it on the FC Banc Corp franchise, we believe will be a very successful operation for us."

CNB's ERIEBANK operates as a division of its main bank, CNB Bank. FC Banc's The Farmers Citizens Bank would also operate as a division of CNB Bank, and Bower said that he plans to retain the local management team.

Given that structure, the buyer is expecting cost saves of 20%. Publicly announced deals this year tend to have cost saves around 25% to 35%.

The deal was priced at 119% of tangible book value, which is in line with the 118.7% median deal value seen so far this year, according to data from ParaCap Group.

Although CNB is an infrequent buyer, observers say they were unsurprised by the deal. Its Erie expansion has performed well, but it is now hitting a critical mass and has been on the hunt for a new market.

"The de novo Erie expansion drove a high degree of growth for a number of years," said Matthew Schultheis, an analyst at Boenning & Scattergood, whose firm advised FC in the deal. "I don't think they feel as if they are finished there, but the pace of growth has slowed, so they've been looking for new markets to go into and duplicate that model."

In 2005, CNB had assets of $747 million and earnings of $9.1 million. By 2012 its assets had more than doubled and earnings were $20.3 million.

Calls to CNB and FC Banc to speak for this story were not returned. The seller is well capitalized and its credit quality appears clean, but commercial real estate made up 72% of its loans at Dec. 31. It may have sought a deal instead of trying to diversify its portfolio, observers say.

"That's really the only blemish, if you want to call it that," Schultheis said. "That is a higher concentration in CRE than any of the banks I follow."

Banking observers have cited the pressure to diversify as one of the reasons smaller banks might be motivated to sell, beyond the universal pressures of the lending and regulatory environment.

"There are a lot of companies who are thinking, 'We survived the recession, but how do we survive the recovery?'' says Terry Keating, a managing director at Amherst Partners in Chicago. "What worked in 2005 might not work so well in 2013."

Another likely trend is banks looking to expand into similar, but not necessarily adjacent, markets. CNB follows F.N.B. (FNB) in Hermitage, Pa., in acquiring a bank in Ohio. Additionally, S&T Bancorp (STBA) in Indiana, Pa., announced in August 2012 it was opening a commercial lending office in Akron, Ohio.

It is a natural extension, Schultheis says.

"Eastern Ohio and western Pennsylvania are more culturally similar than eastern Pennsylvania and western Pennsylvania," he says. "The dividing line only matters when Ohio State plays Penn State."