Happily Newly Wedded

Steve Gardner, President and CEO Pacific Premier Bancorp; Michael C. Crapps, President and CEO First Community Bank; Chris Doyle, President and CEO Texas First Bank; Richard Beard, President and CEO People’s Utah Bancorp; Craig W. Best, CEO Peoples Security Bank and Trust Co.

Five community bankers discuss their marriages with other banks

By Vanessa Drucker

Are wedding bells ringing in your ears?

While not always successful, strategic acquisitions of existing institutions have always been an option for community banks considering quick growth. Sometimes acquisitions have consolidated two competitors in a single marketplace. Sometimes they have allowed one bank to jump with a big splash into an entirely new market. Even during the industry’s pre-Wall Street recession go-go years, acquiring another bank or bank branch, priced and executed properly, could often strengthen a community bank’s long-term position to remain independent.

Since the downturn from the Wall Street crisis, talk amid and surrounding the community banking industry has been swirling about when the next wave of mergers and acquisitions will surface. In pre-recession and post-recession periods, industry surveys have shown that most community banks have always kept an eye out for acquisition opportunities that might fit their strategic goals. However, recently most community banks (despite some contrary talk in the industry) have been looking to acquire rather than to sell, according to ICBA member surveys.

Because of that lopsided buy-rather-than-sell preference and for other reasons as well, few community banks have been tying the knot. So far, only the California and Texas markets have witnessed a noticeable surge in merger and acquisition activity. Nevertheless, some community banks have been successful recently in acquiring others. To learn more about the rationales and expectations behind some recent acquisitions, five community bank executives discuss their institutions’ recent unions with other community banks.

For these five community banks, a handful of common factors have driven their itch to hitch. Foremost, whether implicitly or intentionally, some are joining forces with another community bank to strengthen their operations and balance sheets, a move designed to position their institutions to remain independent for the long term.

Urge to merge

“Preserving community banks is our main purpose, and they usually come to us because they know our strategy is always to remain one,” explains Charles T. “Chuck” Doyle, chairman at Texas First Bank in Galveston County, who founded the community bank in 1973 with $7 million in assets. Preserving community banks was the goal behind Texas First Bank’s acquisition in January of Hull State Bank, a move that added $20 million in loans to Texas First’s balance sheet, as well as $38 million in deposits. The Doyle family-operated community bank now comprises $875 million in assets and 24 retail operations in Galveston, Houston and Beaumont counties.

Richard Beard, president and CEO of People’s Utah Bancorp, a $1.3 billion-asset community bank holding company in American Fork, Utah, expresses a similar philosophical motivation for its recent acquisition of a community bank. “The family who controls our bank is so passionate to keep community banking alive that it’s a religion to them!” he explains. Witnessing shifting dynamics in local banking since about 2005, the family owners recognized the need to sacrifice some autonomy for added size, in order to maintain their community banking status.

Naturally, most community bank mergers are prompted by the desire to increase long-term shareholder value. Seeking greater economies of scale play a pivotal part, especially as regulatory costs have mounted in the wake of Dodd-Frank and Sarbanes-Oxley legislation, says Beard.

People’s Utah Bancorp weathered the recession profitably, but Beard maintains that banks in the $1 billion to $10 billion range can sometimes reach a “sweet spot” of achieving the greatest return on assets, with those growing to more than $10 billion in assets typically underperforming and those under $100 million sometimes struggling as well.

Proximity also frequently motivates acquisitions, leading to geographical expansion, particularly into adjacent areas. For example, People’s Utah Bancorp, the bank holding company that merged Bank of American Fork ($949 million in assets) with Lewiston State Bank ($250 million in assets), is courting economic growth in the Logan, Utah, area, Beard says. The Bank of American Fork’s primarily agricultural franchise, which will incorporate branches running from south of Salt Lake City up to Preston in southern Idaho, will comprise approximately 400 employees and 17 sites, which will continue to operate under their former names.

“The banks are only one cup of coffee away—the time it takes to drink one.”
—Michael C. Crapps, First Community Bank

In another geographical spread, Pacific Premier Bancorp, a $1.6 billion-asset community bank headquartered in Irvine, Calif., has embarked on a string of five acquisitions over the past three years. In the highly competitive Southern California market, Pacific Premier’s purchases of bank operations in Dallas, San Diego and Palm Springs, Calif., have expanded its footprint and brought its tally of accounts to 35,000, its employees to 250 and its full-service branches in California to 15. It also operates retail centers in New Jersey, Connecticut and Texas.

Steve Gardner, president and CEO of Pacific Premier, says the community bank has a two-pronged strategy, both expanding its geographic markets and finding complementary lines of businesses. Having received FDIC approval in 2009 to bid on failed banks, Pacific Premier conducted due diligence on numerous candidates, bid on half a dozen, and succeeded in taking over the $210 million-asset Canyon National Bank in 2011 and the $125 million-asset Palm Desert National Bank in 2012. It subsequently closed on acquisitions for the $356 million-asset First Associations Bank in Dallas last March and for the $242 million-asset San Diego Trust last June.

The bank, which had been growing very rapidly, needed additional funding and deposits to support that growth, Gardner says. As an illustration, he cites the community bank’s acquisition of First Associations Bank, which offered a unique nationwide franchise in homeowners’ association management companies. “The investment bankers brought us this deal in 2012,” Gardner recounts of the Dallas bank acquisition, “asking if we’d be interested in the deposit-rich bank and a platform to grow deposits on a nationwide basis.”

In another unusual acquisition move, Pacific Premier was slated in January to buy Infinity Franchise Holdings, an $80 million-asset specialty lender in San Diego that makes business loans to franchisees of quick service restaurants. As Gardner explains the Infinity acquisition, “We had been looking for three years for a specialty finance line, when their private equity owners decided to sell. The management team had been together some 20 years, had a fine reputation, and those loans provide a good yield for us.”
“Since we are a publicly traded company, every one of our acquisitions has benefitted shareholders in creating franchise value and generating good risk-adjusted returns,” Gardner reports. Additional lending capacity, new products and services like planning and advisory functions, and stronger boards all reinforce rewarding outcomes, the community bankers say.

In Lexington, S.C., Michael C. Crapps, president and CEO of First Community Bank, echoes a quest for proximity as well as a commitment to a shared culture and business portfolio for a recent acquisition. The $630 million-asset institution closed in January 2014 on its transaction to acquire Savannah River Banking Co., located in contiguous Aiken County, Ga. “The banks are only one cup of coffee away—the time it takes to drink one,” Crapps describes, adding, “we had begun to see opportunities coming out of the recession and raised capital in 2012. We publicly announced we would only focus on communities similar to our own lending and deposit environment, and those with a rich local business history.”

In an unusual reverse merger, the $710 million-asset Peoples Security Bank in Hallstead, Pa., a subsidiary of Peoples Financial Services Corp., acquired the $920 million-asset Penn Security Bank, a subsidiary of Penseco Financial Services Corp. in Scranton, Pa. “Both banks were strong performers, but both boards felt the [additional] scale created would enable us to compete more organically in our markets, and absorb regulatory costs better,” reports Craig W. Best, the new CEO of Peoples Security Bank and Trust Co., and formerly CEO and president of Penseco Financial.

Best elaborates: “What attracted us to Peoples was their location in the heart of Marcellus Shale country, where they had experienced tremendous deposit growth; they wanted us because we were headquartered in Scranton, a more metro market, with greater loan activity.”

Walking to the altar

All of the five community bankers that ICBA Independent Banker® interviewed judged and tracked the success of their acquisitions according to operational and financial measures. While each community bank merger and acquisition features a unique dynamic and marketplace, the patterns of such transactions again display certain common threads. The five community bankers reflect on critical aspects of their acquisition process.

“Preserving community banks is our main purpose, and they usually come to us because they know our strategy is always to remain one.”
—Charles T. “Chuck” Doyle, Texas First Bank

Beard, of People’s Utah Bancorp, had been approached by the CEO of Lewiston Bancorp in the spring of 2012, when the two executives discussed the challenges of increased regulation and addressed the idea of partnering. Noting that “every good deal falls apart at least five times,” Beard recounts how the two Utah institutions journeyed through all the stages around naming and branding, governance, board membership, price and employees before finally taking the plunge. He had been concerned about how the regulators would view the structure of the acquisition, so top executives from both community banks met on three occasions with the Federal Reserve, the FDIC and state regulators.

He concludes, “Regulators are a fact of life, try to be as honest as you can, and make sure you pick battles you can win.”

At First Community Bank, Crapps had already long known and respected Randy Potter, CEO of Savannah River Banking. First Community focused on local business and professional service providers in the South Carolina midlands, as well as state government clientele from Columbia. Savannah River’s base included military personnel from Fort Gordon, and academic and medical research customers.

“I was amazed at the similarity of our strategies,” says Crapps, who confirmed his hunch in the numbers involved in the proposed acquisition terms. He laid out the compositions of their respective loan and deposit portfolios in pie charts, which proved to be nearly identical. Initial conversations last March led to discussions around price, with an agreement announced last August.

Says Crapps, “From day one we had a transparent and real sense of trust.”

At Texas First Bank, Chuck Doyle’s sons, Matt and Chris, typically analyze the locations for potential acquisitions. Chris Doyle, who serves as president and CEO, explains how they track a pipeline of potential acquisition candidates, normally contacting those institutions’ chief executives and keeping in touch with them on a regular basis. “We look for good neighbors and friendly competitors who do it right.”

On the recent acquisition, Doyle adds: “Hull State Bank had reached out. They liked our model, our blue collar appeal in a petrochemical region, and the stability of our
balance sheet.”

Negotiations for the Texas First-Hull State combination took about seven months, and regulatory approval arrived on an efficient and timely basis, says Doyle, who credits the smooth process to excellent communication between the parties, good legal representation and the experience gained from having completed two previous full acquisitions. (Doyle mentions one surprise—a set of double fees from vendors to handle the conversion of involved core software systems, as the seller paid exit fees and the buyer conversion charges.)

Across the country in Pennsylvania, Penseco Financial’s board of directors was regularly monitoring about 20 potential acquisition transactions. Although Peoples Security Bank offered a similar culture, a strong balance sheet and complementary business philosophy, its stock traded at a higher multiple. Comparisons reveal the disparity: Peoples Security’s loan portfolio totaled $500 million and Penseco Financial’s was $655 million; one bank had $68 million in tangible equity and the other had $106 million, and one operated 12 locations and the other 13.

“The key moment was when both banks determined that the reverse merger was feasible. Our advisors mapped out the mechanics of how it would work, with both boards willing to give up something.”
—Craig W. Best, Peoples security Bank And Trust Co.

After numerous meetings from February to May 2013 between both community banks’ senior management, the boards of directors for Penseco Financial and Peoples Security each evaluated the risks and considered strategic alternatives to a merger of equals. They analyzed growth, profitability, portfolio composition, asset quality and enhanced management teams. They considered the opportunity to create greater liquidity for shareholders and the preservation of a local bank identity.

With both boards intently focused on shareholder value, the parties were ready to execute the merger agreement last June, and the final deal was completed this past November. “The key moment was when both banks determined that the reverse merger was feasible,” says Best. “Our advisors mapped out the mechanics of how it would work, with both boards willing to give up something.”

In the end, Penseco Financial relinquished its corporate identity, while Peoples Security Bank agreed to have the majority of the new company owned by legacy Penseco Financial shareholders in a 59.2/40.8 stock split. But Penseco Financial’s bylaws required a 75 percent majority vote of approval from those holding its outstanding shares. The fear was not that the majority of shareholders might reject the deal—anyone studying the materials would understand the benefit of the acquisition to the shareholders—but that the usual 45 percent to 50 percent shareholder turnout during annual meetings would not suffice.

Thanks, however, to a proxy solicitation company, Regan & Associates, the affirmative shareholder vote tallied 82 percent in support of the acquisition, with only 8 percent voting against.

At the top of the list of merger and acquisition tips ranks an emphasis on clear communication and frank dialogue, along with attention to a shared outlook and cultural fit. “A slow build-up period works best, for getting to know one another’s cultures,” advises Crapps of First Community Bank.

Chuck Doyle of Texas First Bank agrees, encouraging merger parties to take the time to integrate staff training and learning systems, compliance policies and procedures, and products and systems. Above all, he adds, “make sure you are acting for the right reasons, and that the bank you are acquiring feels the same way about serving the community and remaining independent.”

Vanessa Drucker is a financial writer in New York.