Key Highlights

  • TowneBank agreed to acquire blueharbor bank for about $154 million in cash and stock.
  • Each blueharbor share will be exchanged for $12.70 in cash plus 1.0534 TowneBank shares, implying $50.78 per share at announcement.
  • The deal is part of TowneBank's push to expand its presence in North Carolina.
  • The Acquisition comes as the Federal Reserve's target range sits at 3.75 to 4.00, with the 10-year Treasury Yield near its highest since 2002.

TowneBank (NASDAQ:TOWN), a regional bank based in Virginia, drew attention in the S&P SmallCap 600 on Tuesday, October 6, after announcing an agreement to acquire blueharbor bank, whose shares trade on the OTCQX market under the symbol BLHK. The deal is valued at about $154 million, according to the companies' announcement.

Under the terms, each blueharbor share will be exchanged for $12.70 in cash plus 1.0534 TowneBank shares, which implied a value of $50.78 per blueharbor share at the time of the announcement. Because part of the payment is in stock, the final value to blueharbor shareholders will depend on TowneBank's share price when the deal closes.

"We are excited to welcome blueharbor and its talented team to the TowneBank family," said G. Robert Aston, Jr., TowneBank's executive chairman, in the press release.

TowneBank described the acquisition as a way to enhance its presence in North Carolina. How TowneBank's shares moved on Tuesday could not be confirmed, so the deal itself is the story.

Why Banks Buy Banks

Acquisitions are a common way for regional banks to grow. Buying a smaller lender can bring new customers, deposits and Loan relationships in markets where the acquirer wants to expand, and it can allow cost savings by combining back-office operations and technology. North Carolina has been an attractive market for many banks because of population and Business growth in the state.

Mixed cash-and-stock deals such as this one let the buyer conserve some cash while giving the seller's shareholders a stake in the combined company. Bank mergers in the United States require regulatory approval and typically a vote by the target's shareholders. Integration also takes time, as systems, branches and customer accounts are brought together under one brand, and acquirers usually spell out cost savings and Earnings effects for investors.

Banks in a High-Rate World

The deal comes at an interesting moment for the banking industry. The Federal Reserve raised its target range to 3.75 to 4.00 in September, and the 10-year Treasury yield touched its highest level since 2002 the prior week before easing to about 5.28 on Tuesday. Higher rates can boost the income banks earn on loans, but they can also raise funding costs and put pressure on borrowers.

Michelle Bowman, the Fed's vice chair for supervision, spoke at a community banking conference on Tuesday about modernizing regulation, saying supervisory expectations should be transparent, clear and consistent, and that a bank should not be held accountable for changed expectations discovered only during an examination.

The broader market was strong. The S&P 500 rose 44.98 points to a record close of 7,818.93, the Nasdaq Composite set a record just under 27,600, and the Dow Jones Industrial Average gained 253.38 points to 51,521.28. Smaller companies lagged, with the Russell 2000 slipping to about 2,830.

Regulatory Approval Is the Next Step

Investors will look for the expected closing timeline, regulatory approvals and the blueharbor Shareholder vote, as well as any detail on cost savings and the effect on TowneBank's earnings. Big-bank results begin on October 13, when JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) report.