July 2011 — Uncertainty seems to be the catchword of the moment. Bankers talk of uncertainty relating to regulatory reform, loan growth, asset quality, non-interest income, economic conditions, governmental fiscal policy–the list goes on. Yet despite this uncertainty, whole-bank and thrift M&A deal volume turned up in the second quarter of 2011 to 43, bringing the total volume for the first half to 76. Deal volume was about even with the volume for the first half of 2010 (79 announcements) and approaching the levels for the the last two quarters of 2010.
As Exhibit 1 (above) shows, median pricing has been flat-lined at about 1.08x book for the last three quarters, held in check by the very low prices for the most highly stressed banks. An analysis of deals announced during the first half of 2011 reveals that asset quality guides pricing as it has for the last two years.
(See Exhibit 2 below)
One interesting note is the superior pricing for the seven institutions with NPAs / Total Assets between 2% and 4%. Four of the seven sellers in this 2-4% NPA group were large community banks with assets between $1 billion and $5 billion. In each case, the buyer’s motivation was the strategic value attached to the seller. For F.N.B., the acquisition of Parkvale Financial moved it from seventh to third in deposits in Pittsburgh, while Valley National doubled its deposits in New York and expanded into Long Island with its acquisition of State Bancorp. Abington proved a perfect fill-in for Susquehanna in the Philadelphia market with no overlap, while picking up $95 million of excess capital (which it will deploy in its follow-on acquisition of Tower Bancorp).
Scarcity value was a big part of Comerica’s purchase of Sterling Bancshares as there are few large banks domiciled in Texas. The deal moved Comerica’s deposit share in Houston up to sixth from twelvth and gave it a presence in San Antonio, which it was lacking.
(See Exhibit 3, below.)
In what may be one of the few bright spots in California these days, M&A volume soared to eleven deals during the first half of 2011, eclipsing the full-year 2010 volume of nine. The median asset size of California sellers was $153 million, similar to the median asset size of $146 million for all transactions in the nation. While the median California seller was better capitalized, its asset quality was weaker with median NPAs/ Total Assets of 5.98%. Four of the transactions involved investor groups, three of which made their initial acquisition in 2010. Contingent payments comprised a part of the consideration in two of the transactions. Median prices to book and tangible book of 0.92x were below the national medians as were other pricing metrics. Indicative of the weaker pricing, the median premium to core deposits was a negative 1.85% versus a positive 0.85% for the nation.
The two largest transactions announced so far this year were divestitures. Capital One won the battle for ING Bank FSB, the on-line U.S. subsidiary of ING Groep N.V.(Netherlands). Capital One is paying $9 billion in cash and stock or roughly book value for the $92-billion bank. The deal significantly broadens its funding base and catapults Capital One into the number five spot domestically in terms of deposits. With the deal, ING will be exiting the U.S. depository market, but the proceeds will boost its Tier 1 Capital ratio while reducing the Dutch government’s exposure to a toxic asset pool. The second largest transaction involved PNC Financial’s purchase of the Royal Bank of Canada’s (RBC) U.S. banking operations The deal represents a very strategic extension of PNC’s footprint into the Southeast, especially North Carolina, Georgia and Alabama and augments PNC’s existing presence in Florida. The price was approximately 97% of tangible book for the $27-billion bank and will be paid in a combination of cash and stock. For RBC, the deal is expected to be accretive to its 2012 earnings and raise its Tier 1 capital by 1.4%. RBC will refocus its efforts in the U.S. on wealth management and capital markets.
The common threads running through these three facets of the bank M&A market in the first half of 2011 are: a perception of a tipping point in the credit cycle, easy access to capital, and a continuance of the first-mover advantage theme. While it does appear that asset quality has bottomed at the industry level, in the merger arena, it may be better said that clarity is now sufficient for potential buyers to venture out. Capital appears to be abundant either on buyers’ balance sheets or in the market as almost $7 billion of common equity and $3.5 billion of preferred equity has been raised thus far in 2011. Further, buyers are increasingly comfortable using their stock as currency even though the public markets are off from year-end 2010 levels. Finally, in many of the deals highlighted above, the seller represented a unique opportunity for the buyer to acquire a scarce resource relevant to the buyer at an acceptable price.
In spite of industry and market uncertainties, M&A activity is almost at the peak levels (post-crisis) of the last half of 2010 while pricing closely follows the contours of asset quality. There seems to be a greater willingness on the part of buyers to act decisively in the face of organic growth challenges, especially if the target fulfills a strategic goal. In addition, more sellers are realizing the importance of joining forces to create a larger pool of resources even though the price may be perceived as “low” by some.
Deal pricing is still rooted in the fundamentals of regional economic growth and institutional profitability. Said another way, the value of a bank is based upon its projected growth rate and ROA. Banks that have been receiving premium pricing (at or near 2.0x tangible book) are those that are in healthy, growing regional economies and that have relatively strong net interest margins. Banks with these factors, which also present an opportunity for economies of scale for a buyer, are fetching the industry’s highest prices.
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