Small Banks Attracting More Buyers than Investors

by Robert Barba
OCT 8, 2013 5:15pm ET

The tiny deal between Bridge Bancorp (BDGE) and FNBNY Bancorp is a megamerger of so many M&A trends.

There is a small seller feeling operational pressure, but it has a hard time raising capital to expand its balance sheet.

There is a buyer on the hunt for new markets that only raises capital when it has its target secured.
Moreover, they have an agreement that reflects how buyers and sellers are still wrestling over loan valuations.

Those forces have played out in different banks deals in the last few years, but the Bridge/FNBNY case is noteworthy because it wraps them all together.

Event moved quickly, too. The seller, FNBNY in Merrick, N.Y., bought the banking unit at the heart of the deal 18 months ago. Its plans to build the $270 million-asset bank to $1 billion in assets hit a roadblock when it tried to raise additional capital.

“There was interest, there was a very good reaction in terms of the story,” says John Stewart, the chief executive of FNBNY. “But for a lot of folks, we were too small of an investment.”

In April 2012, FNBNY Bancorp, an investor group, acquired $270 million-asset Madison National Bank, which it renamed First National Bank of New York. The deal was announced in October 2010 and was delayed several times. The new owners spent the first 10 months following the closing cleaning up legacy credit issues and trying to make new loans where they could.

“We were establishing a stronger credit culture here, but it takes time," Stewart says. "In the meantime, we were spending capital to keep the bank operating and getting it moving forward. … It is tough for an institution to carry on for a long period of time if the organic growth doesn’t come."

At that point, the company decided to see “what other opportunities would be available to meet that growth expectation.”

FNBNY and Keefe, Bruyette & Woods began searching for capital around the beginning of this year. FNBNY had a short-term focus on raising $5 million to $10 million, but it wanted eventually to raise a total of $25 million.

Small private placements are often hard to do because investors say it takes the same amount of work to make a small investment as it does a larger one. Additionally, investors are wary that there might not be any clear exit for their investment.

“It is very difficult for smaller platforms to raise capital,” says Joshua Siegel, managing principal of StoneCastle Partners. “Even if you get a great price, you can’t exit. How do you ever get out of it?”
Near the beginning of the summer, the work with KBW became focused on looking at buyers.

For the $1.7 billion-asset Bridge, in Bridgehampton, N.Y., the deal would mean western expansion. It would add a branch in Suffolk County and two in Nassau. Nassau would be a new market to Bridge.

“We’ve added half a dozen branches in western markets over the last few years because I can’t go east” says Kevin O’Connor, president and chief executive of Bridge in an interview last week. “And these are great branches. They spent a lot of money and effort to make them showpieces. They’ll be good billboards for us.”

Bridge and FNBNY feel that they have to get bigger to survive.

“We have the size and scale today to cover the regulatory burden as it exists, but this deal just helps,” O’Connor says.

“Our view – certainly the view of our biggest shareholders – is that we are taking stock in a company that is already at the level where we were shooting to be at,” Stewart says.

FNBNY's investors are expected to get 244,110 shares, valued at $5.3 million on Tuesday.

Additionally, the deal has an earn-out provision that allows the FNBNY shareholders to collect as much as an additional $6.3 million on a couple of loans where the buyer and seller were unable to agree on a value.

The up-front stock value of the deal is roughly 34% of FNBNY’s tangible book value. With adjustments for the credit mark and the earn-out, the price is “close to book value,” Stewart says.
That’s a better deal than if the company had been able to raise capital, observers say.

“Finding a merger partner is going to get a better price than going to raise capital,” says Michael Iannaccone, president of MDI Investments in Chicago. “That is going to be a major factor in all of this consolidation we are expecting. You sell yourself and get the stock of someone else.”

For buyers, having capital to support acquisitions requires a balancing act. A lack of capital could delay a deal, but raising it without one in mind weighs down the balance sheet. In connection with the FNBNY deal, Bridge announced Tuesday it raised $40 million from a stock offering, with $37.5 million in proceeds