Sidhu Takes Page from Sovereign Playbook on Dealmaking

Jay Sidhu is headed back to Wyomissing, Pa., the ground from which he built an $80 billion thrift empire.

Late Tuesday, New Century Bank in Phoenixville, Pa., the institution Sidhu has been expanding over the past year, announced that it would buy Berkshire Bank, based in Wyomissing, Sovereign Bank's former headquarters city. Sidhu built Sovereign into a powerhouse before it was sold last year.

He is adamant that he is following a new playbook, one that puts organic growth first. Still, with the Berkshire deal coming just six weeks after New Century bought the failed USA Bank in Port Chester, N.Y., his new strategy has echoes of the former one.

"Jay will be Jay," said Stephen Moss, an analyst at Janney Montgomery Scott.

If completed, the purchase would push the $900 million-asset New Century over the $1 billion-asset threshold, a key benchmark for a growing community bank. Also, New Century is in the midst of a name change to Customers USA Bank and is still awaiting approval from state regulators.

New Century has raised $70 million in capital in the past year, but unlike Sovereign, which largely grew through acquisitions, his company's growth will be focused organically, Sidhu said.

Yet he said the company will take advantage of acquisition opportunities when they arise. In the case of Berkshire, it was a chance to strike close to home.

"We are not trying to duplicate Sovereign. We are focused on organic growth complemented by acquisitions where it makes sense," Sidhu said in an interview Wednesday. "But we also live here, and I'd be lying if I said there was no nostalgia. We grew a bank here, and it is exciting to grow another. There is a thrill of execution and achievement."

As proof of New Century's primary focus on organic growth, Sidhu can point to the already tremendous leaps New Century has made since June 2009 when he led the initial $17 million investment in the then-sputtering bank.

The bank's loan portfolio totaled $456 million as of June 30, a 113% increase from a year earlier. Since then it has bought the $200 million-asset USA Bank and has continued its organic growth.

New Century's deal for Berkshire is the latest of several in the Northeast, topped off by last week's announcement that First Niagara Financial Group in Buffalo would buy NewAlliance Bancshares in New Haven for $1.5 billion. Analysts said the deals reveal a pent-up demand for mergers and acquisitions among healthy or relatively healthy institutions.

"Bankers are getting anxious. Those that haven't acquired feel they are going to be left behind," said Jeff Marsico, an executive vice president at Kafafian Group in Parsippany, N.J. "Sellers fear that their business model won't work in the new environment."

A phone call to Berkshire was not returned. Sidhu said the $150 million-asset bank approached New Century about a deal because it was bumping up against capital constraints and, echoing Marsico's point, was concerned about its future in the face of compliance with the financial reform law.

"It is very, very difficult for small community banks to survive in this kind of environment," Sidhu said. "Financial reform is great, but you have to have the resources to live in this environment. The days of being able to successfully run a bank under $1 billion in assets are gone."

Sidhu said he is interested in deals for banks similar in size to Berkshire. With Berkshire, he said, the bank was already exploring ways to expand into that market. "Acquisitions are a cheaper way to execute our strategy than to build into a new area," Sidhu said.

New Century is paying tangible book value for Berkshire. The deal is expected to close in the first quarter of 2011.

Sidhu had expressed reluctance this year about open-bank deals because of the difficulty in pricing them. As he put it then, a deal seemingly done on the cheap could turn into a huge premium if credit goes bad.

And Berkshire has blemishes. As of June 30, its nonaccrual loans made up 4.4% of total loans.

Sidhu said his company did extensive due diligence on Berkshire and the par pricing reflects that. He added that, if Berkshire's nonperforming assets increase by more than $1.5 million between now and the closing, his company would have the right to walk away from the deal. Such conditions have become standard, Marsico said, in this new round of community bank dealmaking.

"It is the new order," he said. "Things are still uncertain, so that puts in some additional level of credit protection for the buyers."

Berkshire is to be merged into New Century. Once the deal closes, Sidhu predicted, assets could rise to as much as $500 million in that market. Sidhu has done this before, right there. Sovereign Bank started with $500 million of assets and grew to be a $90 billion-asset institution over two decades.

Yet credit concerns and integration problems came to a head, and Sidhu resigned from the company under pressure from its board in late 2006. Early last year Banco Santander SA bought Sovereign.

Sidhu said he has learned some things since then. He and his management team, largely made up of former Sovereign executives, have gone so far as to put these lessons in writing.

The first is "never deviate from maintaining superior credit quality." The others involve protecting against rate risk, focusing on efficiency and hiring the best people available.

Analysts said Sidhu would do well to follow this advice. "Time will tell if he did, though," said Janney's Moss.