Bank M&A is a study in cause and effect.
Many things can set a deal in motion, including unsolicited overtures, a need for capital and the sale of a major rival.
All of those reasons finally persuaded Ohio Legacy Corp. in North Canton to seek a buyer earlier this year. The $320 million-asset company agreed in September to sell itself to United Community Financial in Youngstown for $40 million.
One of the biggest factors was FirstMerit's agreement in late January to be sold to Huntington Bancshares for $3.4 billion. FirstMerit, which was based in Akron, Ohio, also operated in several markets served by Ohio Legacy's bank.
Ohio Legacy's management team believed the potential market disruption created by the Huntington-FirstMerit deal would entice other banks to enter the market, according to a registration statement that United Community recently filed.
"As a result, management believed that there was a unique opportunity to position [Ohio Legacy] as a viable entrée to the market for an out-of-market bank," the filing said.
Overall, seven banks in Ohio have agreed to be sold since the Huntington-FirstMerit deal was announced, based on data from S&P Global Market Intelligence. The average premium has been 137% of the seller's tangible book value.
To be sure, Ohio Legacy had other reasons to sell itself. Management realized at some point that it would need to "increase capital meaningfully" for the bank to remain independent beyond 2017, the filing said. Doing so ran the risk of diluting existing shareholders.
Ohio Legacy had also come close to selling before. The company signed a letter of intent in early 2014 to be sold to United Community, but it was terminated a few weeks later. Ohio Legacy said it briefly held discussions in late 2015 with an unnamed company.
Management's outlook seemed to change with FirstMerit's pending sale, along with another inquiry from United Community shortly afterward. Ohio Legacy hired Sandler O'Neill in March to help it explore strategic options.
Three companies emerged as potential suitors. United Community in April submitted a preliminary offer that valued Ohio Legacy at $15.50 to $16.50 a share, but the offer was rejected because it "did not meet the board's minimum expectation," the filing said.
The other banks included the institution that had talked to Ohio Legacy last year and an out-of-market company; the filing did not give their names. All three suitors had indicated that they wanted to keep Ohio Legacy's management team in place to run a regional operation.
By August, each company was instructed to provide a final offer. United Community did not offer the highest amount – its offer was 5% less than that of another bank – but it offered a higher percentage of cash, the filing said.
United Community also provided the "most detailed" offer. It included plans for retention and severance, a pledge to keep more Ohio Legacy employees compared with the other offers, and a $500,000 package for local community development organizations.
United Community's offer "was viewed by Ohio Legacy's board as more stable and less subject to fluctuation, particularly since a larger portion of the consideration was cash," the filing said. "The board perceived [United Community's] stock price to be less volatile than that of company A due to its [relatively] low price to tangible book value."
With most details outlined in the offer, United Community and Ohio Legacy quickly reached a definitive agreement, which valued the seller at 140% of its tangible book value. The deal was reached and announced on Sept. 8.
Louis Altman, Ohio Legacy's chairman, will join United Community's board. Rick Hull, Ohio Legacy's president and chief executive, will receive a nearly $1 million severance benefit and will become United Community's regional president. Denise Penz, Ohio Legacy's chief operating officer, is set to receive a roughly $700,000 severance benefit while becoming United Community's head of wealth management.
Jane Marsh, Ohio Legacy's chief financial officer, is not expected to join United Community. She is set to receive severance benefits valued at $427,000.
United Community has said that, excluding one-time charges, the deal should be accretive to its earnings per share by about 15% next year. It should take less than four years for United Community to earn back the deal's expected tangible book value dilution of less than 6%.