The much-anticipated return of bank merger activity is building, but the number of announced deals in the first quarter was a bit off the pace of the last several quarters. Meanwhile, pricing trends and deal terms are beginning to firm up.
After three quarters of deal volume approaching historically “normal” levels, bank and thrift acquisition volume fell to 32 in the first quarter of 2011, but ahead of the 2010 first quarter volume. First-quarter “breathers” are actually common. Looking back over the 2000-2006 pre-crisis period, first quarter deal volume was the lowest of the year in four out of six years. From a pricing standpoint, the sales of distressed banks at low prices and clean banks at much higher prices had the effect of keeping median pricing range-bound between 1.0 to 1.10 times book value as it has for the last four quarters (Exhibit 1).
From the level of activity we are seeing in our sector, deal volume should be higher in the second half of 2011. The complexity of most successful deals today is lengthening the time between initial discussions to the signing of a definitive agreement.
Improving asset quality is bringing greater clarity for buyers and stable-to-improving pricing (especially for clean banks in stable markets) is enticing more sellers. The price paid hinges on the seller’s asset quality as Exhibit 2 shows. During the quarter, sellers with less than 2% NPAs/Assets received a median 1.35 times tangible book, while those with over 6% NPAs / Assets garnered just 0.64 times tangible book. (The 1.77 times tangible book for the sellers with 2% to 4% NPAs / Assets is not meaningful as only two deals reported the price paid.)
Banks were buyers in 69% of the deals with investor groups/management teams the buyers in the remainder. As Exhibit 3 shows, banks tended to buy larger, better-capitalized banks with fewer asset quality issues. Investors and management teams focused on smaller banks and those with greater challenges as noted in the table. Investor groups were able to leave much of the risk with the existing shareholders in exchange for the new capital to sustain and grow the institution. Buyer banks paid 1.24 times tangible book at the median, twice the level paid by investor groups.
While the exhibits above depict median pricing for transactions, prices for healthy, quality franchises in attractive markets are much higher. The acquisition of Cameron Bancshares (Cameron, LA) by IBERIABank (Lafayette, LA) in an all-stock deal valued at $135 million is a prime example. The 2 times 8% tangible book multiple was the second highest price paid for a healthy bank in the first quarter.
Cameron Bancshares (represented by Sheshunoff) is a highly profitable $700 million community bank headquartered in Lake Charles with branches in surrounding parishes. The Lake Charles area has exhibited stable growth over the last three years that is projected to continue. For Cameron shareholders, IBERIA offered a way to liquefy their holdings while maintaining a quality investment in the recovery of the industry.
IBERIA was a successful acquirer of banks in Louisiana and Arkansas before the financial crisis. During the last two years, the company used its experience to triple the size of its franchise through FDIC-assisted deals in Florida, Alabama, and Arkansas. These acquisitions dramatically increased the size of the company, but didn’t provide a commensurate earnings stream due to the high level of low-earning assets acquired. What the Cameron acquisition provides is a large earnings generator along the energy corridor of the Gulf Coast that boosts the company’s core ROAA. This example of a failed bank acquirer willing to pay for a quality, high-earning franchise could be repeated by others.
So the message from the 2011 first quarter is that the M&A market remains very active not only for banks that need to find a resolution to the challenges confronting them, but also for profitable, clean banks in stable to growing markets. While pricing multiples may not be as high as at the zenith several years ago, they are very close on a relative basis in many cases.
What we stated in our last newsletter for both buyers and sellers continues to be true. For buyers, now is the time to move before the desirable institutions in your target markets are taken. Sellers—including healthy banks—should carefully assess the relative value available in today’s market against the backdrop of shrinking margins, intensifying regulation and continuing economic turbulence.