First Chester County Corp. executives have decided that selling the bank at a steep discount to another Pennsylvania company is a better option than remaining an independent, struggling institution.
First Chester announced Monday that it has agreed to sell itself to Tower Bancorp Inc. in Harrisburg for $65 million in stock, or 90% of its tangible book value. However, in an increasingly common wrinkle, the purchase price would drop if the West Chester company's credit quality worsens.
For the $1.3 billion-asset First Chester, whose credit quality has deteriorated during the past year, the deal made more sense than a highly dilutive capital-raising effort, said John A. Featherman 3rd, its chairman, president and chief executive. He is expected to become vice chairman of Tower and would remain at the helm of the First National Bank of Chester County unit.
"Given where our loan portfolio stands, the amount of capital we would have needed to raise would have made our investors very unhappy," Featherman said. "We decided this was a better route. The combination of these two entities is going to make a very attractive franchise."
Investors appeared to agree on Monday. First Chester's stock price rose 66% in heavy trading, to close at $9.11 a share.
Though the deal is not expected to close until the second quarter, First Chester is to get a capital lifeline this week. The terms of the agreement call for Tower's Graystone Tower Bank unit to buy $100 million of residential mortgage and commercial loans, as well as to increase by $4 million the line of credit Graystone bank extended to First Chester last month, to $26 million.
Combined, these steps would let First Chester's bank comply with capital requirements laid out in a memorandum of understanding with the Office of the Comptroller of the Currency that must be satisfied by Dec. 31.
Though the moves would probably avert further regulatory scrutiny, Andrew S. Samuel, Tower's chairman and CEO, said the combined effort also "allows them the ability to continue to grow."
Growth is a subject Samuel knows something about. Through a merger between Graystone and Tower that closed in March, Graystone Financial Corp. went from $616 million to $1.3 billion of assets. It would double in size again through the First Chester deal, with the resulting company's assets exceeding $2.7 billion.
Buying First Chester would give Tower 23 more branches in the southeastern part of the state — in markets that are among the wealthiest in Pennsylvania. Tower's 25 branches are in central Pennsylvania and stretch into Maryland. The companies have similar deposit and loan mixes, though First Chester would bring a wealth management division.
Samuel said First Chester's credit problems are not concentrated in one area yet reflect inadequate credit administration. Boasting a team that includes former regulators, Tower's management should be able to correct those issues quickly, Samuel predicted.
At Sept. 30 First Chester's nonperforming assets had grown nearly tenfold from a year earlier, to $35.5 million, or 3.70% of total assets. Total delinquencies, which include loans 30 to 89 days past due and nonperforming assets, totaled $45.1 million.
Tower said it commissioned two outside reviews of First Chester's portfolio before making its bid. As long as the company's delinquencies remain between $35 million and $55 million, Tower is to pay the agreed-upon price of $10.22 a share at closing. If delinquencies exceed $55 million, however, the amount First Chester shareholders would receive shrinks.
"That structure allows us to preserve the well-capitalized status of Tower, retain the attractive accretion we've built into this deal and minimize tangible book value dilution," Samuel said. "Really, it is just a good way to minimize our risk."
The structure is similar to that of First Niagara Financial Group Inc.'s deal for the troubled $5.6 billion-asset Harleysville National Corp. This agreement ties the ultimate price to the amount First Niagara would be required to put toward recapitalizing Harleysville.
"It really is a function of the times we are in," said Matthew Schultheis, an analyst at Boenning & Scattergood Inc.; "we are seeing a lot of deals that have some sort of sliding scale depending on the credit quality because once you buy something you have to be able to support it. Three years ago deals were really cookie-cutter. Now it is becoming evident that every deal has to be more specialized in order to get done."
Still, given the price and a promise of 20% accretion to earnings over the long term, analysts viewed the deal positively. Samuel said future deals would probably be smaller but that he is not opposed to doubling the company's size again.
"It has been their game plan to double or even triple in the next few years," said Anthony Polini, an analyst at Raymond James & Associates. "This puts them way ahead of schedule, but there is just a window of opportunity right now."