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Investors' deal termination likely means M&A pause

Another deal has failed to pass regulatory muster, this time likely snagged by Bank Secrecy Act/anti-money laundering issues.

Short Hills, N.J.-based Investors Bancorp Inc. terminated its deal with Bank of Princeton after both companies concluded the FDIC would not approve Investors' application before the March 31 termination deadline. The news was announced in a Jan. 24 press release.

The move was unexpected but not entirely surprising, according to sell-siders who issued notes in the wake of the news. Investors was under an informal agreement with the FDIC and the New Jersey Department of Banking and Insurance over matters related to the Bank Secrecy Act and anti-money laundering compliance.

While management had sounded "optimistic" in previous earnings calls that they would be able to exit the informal agreement by early 2017, Sandler O'Neill analyst Mark Fitzgibbon wrote that "history would suggest that institutions typically take more like 18 months to [two] years to extract themselves from these" in a Jan. 24 report. He pointed out that only five months has passed since the August 2016 agreement announcement.

"We think today's termination agreement suggests that despite a massive effort by the company to remedy this issue with regulators, it may still take a while before it is put to bed," he wrote. "Until such time as that occurs, we would expect [Investors] to be out of the M&A business."

Additionally, both banks have concentrations in commercial real estate, an area that has garnered special attention from regulators, though Investors maintained that it was not a motivator in Bank of Princeton's decision to sell. Bank of Princeton's total CRE loans were 424.89% of risk-based capital, growing 55.4% over the last three years, according to SNL data. Its construction and land development loans were 153.07% of total risk-based capital; all three were in excess of the 300%, 50% and 100% respective thresholds guided by regulators. Investors' total CRE loans were 380.42%, mostly attributable to its multifamily portfolio. CRE loans had grown by 93.9% over the last three years, but its C&D loans were below the threshold at 9.39% of total risk-based capital.

But staying out of the M&A market might be a positive for the bank, wrote Piper Jaffray analyst Matthew Breese in a Jan. 24 report. He said the bank's management team may be perceived as willing to do deals that could push the limits on an acceptable tangible book value earnback period. That perception stems not from the Bank of Princeton deal, which carried an earnback period of 3.5 years under the crossover method, but from the merger agreement of the terminated sale between Astoria Financial Corp. and New York Community Bancorp Inc. Breese echoed a charge from Compass Point analyst Laurie Havener Hunsicker that Investors was an interested party in the transaction, and may have submitted a bid that carried an earnback time period that was longer than five years. Recently, Compass Point analysts argued that Investors could be a potential suitor for Astoria following its terminated agreement to sell to New York Community.

"Publicly, management has stated they would stay within the acceptable earn back timeframe (five years or less), but our view is that there is lingering skepticism from the investment community," Breese wrote.

Additionally, the bank will reach its three-year moratorium on selling itself in May 2017, a regulatory condition of its second-stage conversion. Breese wrote that sitting out on the buyer's side may make Investors "an incrementally more likely seller." He wrote that the bank's shares could be worth $16 to $18 apiece, or 2x to 2.3x tangible book value.