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Summary

  • National Penn Bancshares announces the acquisition of TF Financial Corporation.
  • Significant acquisition premium is offset by sizable expected cost synergies.
  • I have not forgotten about the dramatic performance during the financial crisis, and continue to shun the shares.

National Penn Bancshares (NASDAQ:NPBC) announced the acquisition of TF Financial Corporation (NASDAQ:THRD). The deal is rather modest, adding little less than 10% in total assets, but marks the bank's growth ambitions.

That being said, I believe investors largely invest in National Penn for its generous dividend. Lack of historical capital gains makes it easy for me to shun the shares.

Deal Highlights

National Penn announced that it has entered into an agreement to acquire TF Financial.

Under terms of the deal, investors in TF Financial stand to receive 4.22 shares in National Penn, or $42.00 per share in cash, upon their own election. The company has set an overall limit to a 40% cash component and 60% equity consideration in financing the deal.

National Penn reports a 20 times earnings multiple for the deal, while the price tag values the bank at 144% of its tangible book value.

National Penn will acquire $846 million in assets, $609 million in loans and $692 million in deposits. The company has 18 retail and commercial locations in Pennsylvania and New Jersey.

Impact Of The Deal

National Penn is paying a steep price at 20 times earnings, offering a huge premium to the tangible book value as well. The 32% premium offered for the stock is rather large as well, compared to Tuesday's closing price.

To earn back the steep premium being paid, National Penn anticipates to save 40% of TF's operating costs. To achieve this, two locations will be closed.

The company will take a one-time charge of $10 million to achieve these synergies, which are anticipated to add $0.04 per share in annual earnings going forward. This translates into accretion of about $5 million per annum going forwards.

The pro forma combination will result in a pro forma Tier-1 common ratio of 12.6% and a risk-weighted capital ratio of 15.0%.

The new bank will hold roughly $9.5 billion in assets, focusing largely on its operations in Pennsylvania, while the acquisition furthermore opens a door to expand into New Jersey.

Implications For Investors

Shares of National Penn ended the day roughly flat after the company announced the acquisition of TF Financial. Investors in the bank are still largely attracted to the quarterly dividend of $0.10 per share, providing investors with a nice 3.8% dividend yield.

The bank is trading at a roughly $1.5 billion valuation before the deal will close. The bank posted earnings of just $53 million over the past year, after taking a $65 million debt extinguishment charge. Operating earnings are closer to $100 million, which still results in a 14-15 times earnings multiple, as the company operates with a very high payout ratio.

That being said, long-term investors are still feeling the pain of the leverage, as National Penn has tripled its outstanding share count over the past decade. Unfortunately for investors, the bank had to raise capital at a time when shares were trading at very low prices. This is after the company posted a $348 million loss in 2009.

That mistake alone wiped out years of returns. As a long-term investor, I find a back-test of the performance during the recession very meaningful. National Penn's fail makes it easy for me to pass on this one.

Source: National Penn Bancshares - High Dividend Payer Announces Acquisition Of TF Financial