As regulators delve into BB&T Corp.’s planned $1.8 billion takeover of Allentown-based National Penn Bancshares Inc., the shareholder value of the deal has become a subject for debate.
In a written summary, financial services specialists Keefe, Bruyette & Woods said National Penn did right for its shareholders, noting the bank was “precariously straddling” a $10 billion threshold for assets. Passing $10 billion makes a bank’s loans and other assets subject to additional federal banking compliance rules and limits on customer fees.
National Penn, with $9.6 billion in assets, is the second-largest bank in the Lehigh Valley in terms of deposit share.
“The $10 billion threshold is a big issue,” said James Deutsch, a former Lehigh Valley bank executive. He estimated costs between $5 million and $10 million to meet the regulatory requirements, and finding the revenue to recoup those costs is tough in today’s low interest rate environment.
BB&T said it will pay either $13 in cash or a portion of its stock for each National Penn share, which is too low for Ron Angle, a former Northampton County councilman who owns about 70,000 National Penn shares.
“This was a $17 stock with a wonderful dividend,” said Angle, of Upper Mount Bethel Township, who would have preferred the stock priced at $15 to $16 a share.
He said the deal is good for Scott V. Fainor, National Penn CEO, but not for shareholders, adding, “I don’t like the deal in terms of shareholder value.” National Penn shareholders must approve the proposed deal; Angle said he would vote against it.
The cash price is higher than National Penn’s share value since the financial crisis of 2008-09 but far below the more than $20 per share it traded at in the mid-2000s.
The $13 price per share is irrelevant, said Deutsch, a partner with private equity fund Patriot Financial Partners LP in Philadelphia.
“Back in the 2000s, banks had lower regulatory capital requirements,” he said. “In an acquisition, you could afford to pay at a much higher price. Now you need more capital, so you can’t afford to pay higher share price.”
Last week, when the two banks announced the planned merger, Fainor said in a news release that it “will continue to benefit our shareholders, employees, customers and communities.” He did not respond to requests for additional comment.
“I thought Scott was very smart in terms of recognizing that BB&T was in a position to offer share price for his shareholders,” BB&T Chairman Kelly S. King said during the conference call.
Despite the benefits, there was some concern on Wall Street about the price BB&T agreed to pay for National Penn. The information firm SNL Financial reported the deal value, on a per-share basis, to be nearly 220 percent of “tangible book value.” That is well above the average for bank and thrift targets in the mid-Atlantic since mid-August 2014, when it was about 160 percent of tangible book value.
BB&T’s King acknowledged during a Tuesday conference call with financial analysts that, on a tangible book value basis, the price was slightly high. But he said that was due to National Penn being profitable. Tangible book value is a method of valuing a company on a per-share basis by measuring its equity after removing any intangible assets, according to investopedia.com.
Hours after bank officials formally announced the merger, several law firms issued news releases saying they are investigating the deal. The firms cited such issues as whether National Penn’s board of directors failed to adequately shop the bank, and whether the board properly negotiated its share price.
BB&T spokesman Brian Davis declined to comment.
Deutsch described such actions generally as legal nuisance, noting it’s not unusual for attorneys to raise those questions.
When the deal closes in 2016, BB&T, a Fortune 500 company whose name stands for Branch Banking and Trust, will hold the No. 4 ranking in market deposit share in Pennsylvania, trailing PNC, Wells Fargo and Citizens Bank. After the deal clears regulatory and other hurdles, BB&T’s logo will appear on National Penn buildings.
National Penn has been instrumental in Allentown’s downtown building boom. Besides occupying almost half of Two City Center, it has provided $185 million in revolving construction financing used by the zone’s largest developer, City Center Investment Corp.
The bank, which moved its headquarters from Boyertown to Seventh and Hamilton streets only 15 months ago, will become the regional hub for BB&T, which recently acquired Susquehanna Bancshares Inc.
Fainor, who earned $2.3 million last year in pay and other compensation, is scheduled to become a BB&T “group executive” with responsibility for Pennsylvania and several other states under the BB&T merger. David B. Kennedy, National Penn’s chief banking officer, will become regional president.
Meanwhile, the Federal Reserve Bank’s Richmond office will review the merger because BB&T, which is based in Winston-Salem, N.C., is headquartered in the Richmond district, said spokeswoman Laura Fortunato. It also is in charge of the review because the deal technically involves bank holding companies, not banks.
Speaking generally, Fortunato said once Federal Reserve members receive the formal application, they can act within 60 days of the filing, but several factors, including the gathering of public information, could delay a decision.
“Beyond that, we don’t specifically talk about the details until more information is publicly available,” she said.
National Penn shares closed the week at $12.23, down 22 cents, in Nasdaq trading. The stock has ranged from $9.17 to $12.80 a share during the last year.
BB&T, with $210 billion in assets, has a presence in 15 states and Washington, D.C.
610-820-6694
ABOUT THE BANKS
NATIONAL PENN
Headquarters: Allentown
Branches: 124 in Pennsylvania, New Jersey and Maryland
Assets: $9.6 billion
Deposits: $6.7 billion
BB&T CORP.
Headquarters: Winston-Salem, N.C.
Branches: 2,149 in 15 states and Washington, D.C.
Assets: $210 billion
Source: BB&T Corp
