How Two Small Thrifts Sold for More Than Expected

BNC Bancorp delivered a one-two blow for bankers in North Carolina who are eager to see more consolidation.

The High Point, N.C., company (BNCN) announced plans Wednesday to add to its growing list of acquisitions, agreeing to buy South Street Financial in Albemarle and Community First Financial Group in Chapel Hill for roughly $24 million each.

North Carolina is home to at least six acquisitive banks with private-equity backing that have struggled to find targets willing to sell. BNC's need to expand may have helped South Street and Community First, small thrifts with relatively high levels of nonperforming assets, sell at prices near their tangible book values.

"Banks in North Carolina had been viewed as good deals for a while," selling at discounts, says Tony Plath, finance professor at the University of North Carolina at Charlotte. "But I think the valuations are normalizing, largely because the demand for these small franchises is getting a lot stronger."

Certainly there are plenty of consolidation-minded banks knocking on the doors of every bank and thrift in North Carolina. Many of those buyers are likely finding it difficult to meet internal growth projections without pursuing deals.

Meanwhile, conditions have improved enough in the state to give acquirers a better sense of a target's credit quality, along with an individual market's long-term growth potential. It has also helped strengthen the currency of buyers such as BNC.

"Things are getting more expensive because conditions are improving," says Rick Callicutt 2nd, BNC's chief executive.

Community First, which owns the $229 million-asset Harrington Bank, agreed to sell at 99% of book value, in a process where suitors submitted bids. South Street, the parent of the $281 million-asset Home Savings Bank, is going to BNC at 101% of tangible book as part of a privately negotiated transaction, Callicutt says.

Pricing seems to have improved quickly in North Carolina. In May, Ron Swanner, South Street's chairman and CEO, made it clear to shareholders that he doubted the thrift could receive anywhere close to tangible book, noting the banks in the state were selling at a steep discount.

Calls to Swanner were not immediately returned.

Improved valuations also reflect buyers' increasing comfort with sellers' loan portfolios. BNC conducted an extensive review of the nonperforming assets at South Street and Community First, and Callicutt says the companies' numbers are misleading.

About 13% of Community First's assets are listed as nonperforming, though a number of those are restructured and performing. The Office of the Comptroller of the Currency required Community First to classify them as nonaccrual loans. "Those will become performing loans for us" when the sale closes, Callicutt says.

At South Street, nonperforming assets make up about 7% of total assets, though half of that amount involves two large commercial loans, Callicutt says. And 80% of the thrift's nonperforming assets involve smaller consumer loans.

"It typically takes us about a year to totally go through" and clean up a seller's loan portfolio, Callicutt says. "This will not be a two-year repair job."

Nonperforming assets at small thrifts are "not a problem for a bank like BNC with the right size and adequate capital," Plath says. "They're not buying a balance sheet. … They are looking for growth-oriented markets by picking up small institutions that don't have a growth trajectory or access to capital."

BNC may have been too conservative with the marks it will take on the sellers' troubled assets, says Brady Gailey, an analyst at KBW. "The actual losses could be lower [than forecast], which would be another benefit to earnings," he says.

"I like these deals," Gailey adds. "These are somewhat troubled sellers, but the math seems to work. There is only 3% tangible book value dilution and, at a minimum, 12% earnings accretion" in 2015.

South Street may have had an added incentive to sell. In May, Mark Jaindl, a Pennsylvania banker who owns about 22% of the thrift's common stock, attempted to take over three board seats. South Street's slate of directors prevailed by less than 100,000 shares, capturing just 48% of the total vote.

Jaindl, who claimed before South Street's annual meeting that he had offered to buy the thrift for $8.25 a share, indicated after losing that he would consider mounting another challenge in 2014.

Shareholders "wanted to give management another chance to get this thing righted," Jaindl, chairman and CEO of American Bank in Allentown, Pa., told American Banker on conceding shortly after the meeting. "If things don't improve over the next year, I will certainly get more support."

Jaindl declined to take credit for South Street's sale, though he said in an interview Wednesday that he was "very happy to see the bank being sold to a very good company." He also echoed the sentiment of industry observers who believe that smaller institutions with limited resources will have no choice but to sell in coming months.

"BNC has a lot of additional products to offer," particularly to commercial clients, said Jaindl, who expects to vote his shares in favor of the sale. "BNC will be able to take this footprint and do a lot of positive things. It is tough to do that when you are a small institution."

BNC has agreed to buy nine banks since early 2010, adding more than $2 billion in assets along the way. In many ways, the company is starting to look like BB&T (BBT) in the early 1990s, which began to grow under then-CEO John A. Allison by snapping up small thrifts. In fact, BB&T tried to buy Home Savings in 1994, but withdrew its offer after hitting a roadblock with the Federal Deposit Insurance Corp.

"We have studied BB&T's strategy at great lengths," Callicutt says. "I think there are lessons to be learned from that, but we're not sitting here aspiring to be BB&T."

While other bankers have discussed plans to reach certain asset sizes, Callicutt says he is focused on getting BNC's stock price to $20 a share and annual earnings to $1.50 a share. BNC's stock closed at $15.49 on Tuesday before the deals were announced.

"We feel good with our capital and with the earnings power being built into this company," Callicutt says.