Weathering years of losses and slogging through sour loans has paid off for a central Connecticut thrift.

Farmers and Mechanics Bank, Middletown, Conn., last week agreed to sell to Providence-based Citizens Financial Group for $53.2 million in cash.

That's 1.8 times stated book value - a high premium for a thrift, given prices paid in recent acquisitions. It's also a generous acknowledgement of management's success in restoring the once-ailing institution to profitability.

"I give the management and directors pretty high marks for salvaging a troubled institution several years ago, being fairly bold, and pumping in capital and getting it in good shape for shareholders," said John Carusone, president of Bank Analysis Center in Hartford.

Heavy trading in Farmers stock following the announcement prompted thrift officials to remind investors of a stipulation in the bylaws limiting ownership stakes to 5%. That limit is to remain in effect until Dec. 10.

The deal, adding $540 million of assets and 12 branches, would increase Citizens' Connecticut franchise by 72%, and make thr bank No. 1 in the southeastern part of the state. Citizens currently has $750 million of assets in the state, with 18 branches and two business banking offices.

The completion of Citizens' ninth purchase since 1992 also will propel the $14.5 billion-asset company, which is co-owned by the Royal Bank of Scotland and the Bank of Ireland, toward its goal of being a true competitor to Fleet Financial Group and Bank of Boston Corp. in New England.

"This puts them on the way to being a major regional player," said Gerard Cassidy, bank analyst for Tucker Anthony's Hancock Institutional Equity Services. "This acquisition will certainly be a component of its strategy to be a major player in the banking market here in New England."

The acquisition would push Citizens' Connecticut franchise farther south and west from its current base around New London and New Haven, and solidify the bank's position in New England behind Fleet and Bank of Boston.

"It's a positive for both parties," Mr. Carusone said. "It's a natural extension of what Citizens has already acquired."

The transaction, subject to shareholder and regulatory approval, is expected to close in the fourth quarter of 1996.

Under the agreement, Citizens would pay Farmers shareholders $32 per share in cash, which is about 1.56 times book value after adjustments for Farmers' remaining deferred tax asset. Citizens will be allowed to use the tax asset.

As part of the transaction, Farmers eventually is to be merged into Citizens Bank of Connecticut. That wouldn't happen until the second half of 1997, with Farmers operating under its own name until then.

Citizens plans to apply to keep Farmers' state charter as a foundation for further growth in Connecticut and to maintain a regional state headquarters in Middletown.

The deal marks the end of a long road for Farmers' management. Officials have struggled with high nonperforming assets and substantial losses for several years, taking heavy hits to income several times from bulk asset sales in an effort to cut bad loans quickly and get back on track. The thrift, which has been under regulatory scrutiny since 1991, has posted a profit since 1994.

"This is a bank that has made a terrific turnaround and has good management," said James Dorsey, a spokesman for Citizens.

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