WILMINGTON – MidCoast Community Bancorp has agreed to be acquired by Mansfield, Pennsylvania-based Citizens Financial Services for an estimated $31 million less than five years after CEO Eric Hoerner took over the reins following what one of its board members called “a harsh turn of events.”
As of June 30, 2019, MidCoast had $268 million in total assets, $231 million in loans, and $213 million in deposits, with a loan portfolio 58% in commercial real estate. Deposits are heavily weighted toward CDs, which make up 63% of the portfolio. MidCoast considers itself a business bank with more than 3,500 customers, 800 lending relationships, and three branches in New Castle County.
Citizens has “a broader range of products than we do,” Hoerner noted. “They have typical cash management, business accounts, and so forth that we don’t have. They also have a wealth management division, and their lending limit is generally at least twice our lending limit. And in some cases, it could be three to four times our lending limit.”
The sale isn’t scheduled to close until April 2020, but the bank has already increased its lending limit to be more in line with Citizens Financial.
Equity analysts Scott Beury and Erik Zwick of Boenning & Scattergood described the deal as “slightly cheap on all multiples” and “excellent from a financial standpoint,” adding that “MidCoast has a solid underlying franchise and strong growth potential but is not currently earning the full potential of its balance sheet.”
The fact that MidCoast sought a buyer is not unusual. In 1994, 25% of U.S. bank assets were controlled by banks with less than $1 billion in assets under management. That number fell to 6.6% earlier this year. Today, community banks like MidCoast control just $668 billion of the nation’s $13.3 trillion in assets, yet the Independent Community Bankers of America told DBT earlier this year that more than half of the small-business lending in the country is done by community banks.
Citizens Financial President and CEO Randall E. Black said his company is “committed to remaining a financially strong community bank, which means regularly evaluating new markets that can provide profitable growth and make sense from a strategic perspective. Delaware’s New Castle and Kent County markets are robust with economic growth and favorable demographics.”
There has been no decision yet on whether MidCoast will be rebranded as First Citizens Community Bank, Black said.
Hoerner said Citizens Financial is Pennsylvania’s second largest agricultural lender with some customers in northern Chester County, which meshes well with MidCoast’s “decent book of a mushroom-related business in southeastern Chester County.”
But before MidCoast could get to this point, Hoerner and his 39-person team had to fix the balance sheet, raise capital, and establish a sufficient level of profitability that would enable the bank to sell to another institution.
Hoerner started as a MidCoast investor and then became a board member in January 2014 following the firing of the bank’s founder, James Ladio, who was accused in July 2013 of two counts of bank fraud and money laundering; the subsequent collapse of a merger agreement with Bryn Mawr Bank; Ladio’s guilty plea; and the identification of nearly $12 million in non-performing loans in its then-$240 million loan portfolio. Hoerner became CEO in January 2015.
“Our priority when making decisions was first, safety and soundness, then profitability, then growth,” Hoerner said, adding that the bank was never in danger because “the capital ratios were fine” and there was a lot of customer loyalty because of longstanding relationships with the MidCoast lending team.
Hoerner pointed to a couple of ways the bank improved its balance sheet.
“We had $11.5 million in loans that weren’t accruing interest, so there’s $400,000 a year in lost revenue that we had to clean up,” he said. “We also cut a number of operating expenses. Moving here [to the Delle Donne Corporate Center from the Wilmington Riverfront] saved us $175,000 per year and we bought our Kirkwood branch, which also saved us money.”
“On the lending side, once we got things cleaned up, then we restarted the lending effort in a very focused and disciplined way and have grown nicely since then,” he added. “We actually shrunk the loan portfolio from $240 million to about $155 million. And it’s back up to about $235 million.
“Under Eric’s leadership, we were able to reduce the number of non-performing loans down to almost none,” said MidCoast Board Member Joy Barrist, a partner at Potter Anderson & Corroon who previously represented the bank as outside legal counsel handling all workout matters around the time that Hoerner became CEO. “Eric has been a tremendous asset to MidCoast. He has guided and directed the bank down the path of recovery and growth following a harsh turn of events that many institutions would not have survived.”
Citizens Financial CEO Black said his team is looking forward to working with MidCoast Chief Banking Officer Bill Lattanzio and his highly experienced business development team to accelerate commercial growth in the market.
“As a leader in Ag Banking, we’re eager to enter Kent County and the surrounding markets to continue to diversify our expertise in agriculture and grow that arm of our organization,” Black said.
Hoerner will be giving up his CEO responsibilities after the sale closes but has a six-month consulting agreement that could be renewed.
“I think we ended up with an outstanding acquirer and I think we did the best we could for our shareholders, our employees, and our customers,” he said.