More Evidence Bank M&A Market Is on the Mend

In another sign that the bank mergers and acquisitions market is thawing, KBW Inc. has resumed publishing its Bank Takeover List after a hiatus of nearly two and a half years.

The investment bank said last week that it wants to get ahead of the curve by reviving the list, which it had sent to clients several times a year from the late 1990s through 2007. KBW's timing seems on the mark: Bank consultants said they are helping some clients assemble potential deals, while other banks are actively looking.

"It wouldn't surprise me if one's announced today," said Jim Wheeler, a partner at Morris, Manning & Martin in Atlanta who represents banks in M&A deals. "These are happening. People are in discussions; people are doing deals right now, negotiating them and meeting with regulators right now to get them approved."

Earnings pressure is causing banks to reassess their long-term profitability, and the reality is especially stark for the smallest banks, many of which are looking to merge to stay alive. KBW said it expects a wave of activity in the next 18 to 24 months, and identified 75 companies that could be buyers, sellers or buyers that could then become sellers.

"We're confident that we're closer because price discovery is improving," said Christopher McGratty, an analyst at KBW's Keefe, Bruyette & Woods Inc. "Banks are beginning to know what the value of the assets are on their balance sheet."

Among the 38 potential buyers on the list are the $2.2 billion-asset OceanFirst Financial Corp. in Toms River, N.J.; the $8.1 billion-asset Northwest Bancshares Inc. in Warren, Pa.; and the $2.2 billion-asset First Community Bancshares Inc. in Bluefield, Va.

Potential sellers include Susquehanna Bancshares in Lititz, Pa., with assets of $13.6 billion; Boston Private Financial Holdings Inc., with assets of $3.2 billion; and the $6 billion-asset Western Alliance Bancorp in Las Vegas.

Perhaps the most appealing to investors are the potential buyers turned sellers, McGratty said. Those are companies that will acquire other banks to become more attractive to a larger acquirer down the road. In that category, KBW lists the $1.1 billion-asset Citizens South Banking Corp. in Gastonia, N.C., and the $7.3 billion-asset First Midwest Bancorp Inc. in Itasca, Ill., among others.

The M&A market began to tank in 2007. That year there were 284 acquisitions, with an average price-to-tangible book ratio of 229%, according to the investment bank Carson Medlin Co. In 2009, the number of deals dropped to 123; so far this year, just 67 have closed, with an average price-to-tangible book ratio hovering just over 100%.

The decline in open-bank deals stems in part from the availability of failed-bank deals, in which banks often share potential losses with the Federal Deposit Insurance Corp. But those arrangements are starting to lose some luster, McGratty said. While there are still plenty of opportunities to acquire failed banks, stiffer competition has given the FDIC more bargaining power, and made the deals less attractive.

McGratty said the industry faces profitability headwinds, including higher capital costs and a heavier regulatory burden. As banks seek to increase shareholder returns, selling is becoming a better option, he said.

This is especially true for banks with assets of less than $500 million, said Gray Medlin, the president of Carson Medlin in Raleigh. "They see the operating conditions for a small bank in the future to be difficult, and they want the advantage of efficiencies and economies that they might get from combining some of their operations," he said. "They see themselves as maybe more attractive for the purposes of attracting capital from a bigger company."

Medlin expects much of the consolidation to come from banks chartered in the past five to 10 years that started with the implicit understanding that management would expand operations and then sell for a rich price. Such banks are just now realizing that probably won't happen, and that the only way to grow will be to merge with someone else, he said.

Also coming to the table are banks in a gray area — not healthy, yet not on the verge of failing. "Under the new banking environment … they're not going to be able to do as well as they once thought," Medlin said. "So they're seeing that yeah, they can survive, but how prosperous can they be?"

How soon will the deals come together? "That's the $64,000 question," McGratty said. The answer depends on whether the economic recovery continues, or whether it stalls, as some observers expect. Medlin said he has seen M&A activity pick up in the past month — he wrote proposals for three deals last Wednesday alone — and that he expects more announcements next quarter.

Some banks on KBW's list were not showing their cards. Michael Fitzpatrick, the chief financial officer at OceanFirst, said it is "always looking for opportunities," but he would not say whether an acquisition was imminent. (A deal to acquire Central Jersey Bancorp fell through last year.)

"I think deals come along many times when you least expect it," he said. "A lot of times M&A activity can't be planned. It's just something you have to be prepared for."

Kim Price, the chief executive of Citizens South, said the bank is looking primarily for failed-bank deals in its market, and didn't seen an opportunity for an open-bank acquisition yet. Asked whether the bank would consider selling — as KBW predicts — Price said "we always have to consider … what's in the best interest of our shareholders."

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