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Two Times Book Is All You Can Expect in Bank M&A

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Want to sell your bank for the best possible price? Catch the merger wave early.

That is the advice investment bankers have for would-be sellers hoping deal multiples will continue rising with deal volumes.

Healthy banks that agree to sell early in the consolidation cycle have the best chance of fetching a top price because few banks are worth it and even fewer buyers have the money to pay up, dealmakers say.

More simply put: it is a buyer's market.

"There is what you call a first-mover advantage," says Michael Cavallaro, director of FIG Partners, a boutique M&A advisory outfit in Atlanta. "Some banks that wait too long may find themselves at the altar with someone they didn't want to be there with, at a price they thought they were never going to take."

There were 175 bank and thrift mergers announced through the end of September, putting 2012 on track to exceed the 178 transactions announced in 2011, according to SNL Financial. The average seller has agreed to a multiple of 114% of tangible book this year compared with 101% in 2011.

Bank M&A remains deeply depressed by historical standards. There were 293 deals in 2006, the peak of the last bank consolidation wave, and the average seller got 244% of tangible book, according to SNL Financial. The best targets could expect 300% or more in those days.

Investment bankers hoping to fuel bank M&A's momentum say their job is to convince the most desirable sale candidates that 200% of tangible book is the best they can expect for the foreseeable future. Banks in the Northeast and Midwest — or those in other stable markets that have scarcity value, cheap funding and steady profits — have the best chance of commanding such a price.

"The returns in this business are less. That means, standalone, you are worth less," says Michael Barry, managing director and head of financial institutions M&A for Stifel Nicolaus Weisel, the investment banking unit of Stifel Financial (SF). "I personally look at [200% to 210%] or modest premiums to that as the gold standard."

Cavallaro puts it another way: "Two times book is the new three times book."

Both cite a $233 million merger in upstate New York earlier this month as a bellwether for healthy bank M&A. Alliance Financial (ALNC) of Syracuse agreed to sell for a price of 211% of tangible book to NBT Bancorp (NBTB) of Norwich.

That all-stock deal was the year's fifth transaction with an announced price worth 200% of tangible book or more. Only seven banks or thrifts that sold for $50 million or more since June 2010 went for at least 200%, according to Keefe, Bruyette & Woods (KBW).

Alliance's board saw favorable supply-and-demand dynamics. Most banks that have decided to sell in recent years are tiny or distressed. The $1.4 billion-asset Alliance wagered that a healthy bank of decent size could fetch a high multiple, given a lack of sell-side competition.

Alliance's price as a multiple to equity was low by historic standards. But its sale price as a multiple of profits was not, says Matthew Resch, managing director and co-founder of Ambassador Financial, a boutique investment bank in Allentown, Pa., that advised NBT in the transaction.

Alliance agreed to sell for a multiple of more than 19 times earnings over the last 12 months.

"If we go back for the last 15 years or so and you look at the M&A activity in the community banking space, the median multiples on earnings tend to be 19 to 22 times," Resch says.

Sale multiples of 19-to-22 times profits may have equaled 250% of equity five years ago but today only work out to 200% of equity because banks make less money, he says.

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