Buyers are starting to crowd the M&A dance floor.
The postcrisis years had been a bank buyer's market. Loads of sellers were ready, willing and able and at times, desperate to pair up. For every seller holding out for two times tangible book value, there was another willing to take little to no premium and perhaps some stock with upside potential.
However, the market is shifting. Investors have embraced recent deals, the economy is on better footing and buyers are more willing to boogie with banks that have iffier portfolios. In other words, lots of buyers want to cut a rug, lifting the spirits and perhaps asking price of sellers.
"We are actively looking but we do feel like there is some pricing pressure," Greg A. Steffens, president and chief executive of Southern Missouri Bancorp (SMBC) in Poplar Bluff, said last week in a conference call on its quarterly results.
Others who "failed to acquire are getting a little bit more antsy," he said. "There are more people looking and getting a little more aggressive on pricing."
It is about time the rest of the country caught up to the hot Texas market, says Dory Wiley, president and chief executive of Commerce Street Capital, a broker-dealer in Dallas. Wiley says that he has been warning for several years that competition would drive up prices.
"Buyers don't want to give away their premium, but they need to be realistic," Wiley says. "It has been a little bit easier to see it coming from here, than it was in the Midwest or the Inland Empire [of Southern California]."
A deal priced at two times tangible book is relatively common in Texas. The rest of the country has a ways to go but will likely return to that level, Wiley says.
"Buyers know that they have to up their game and be a little bit more aggressive," Wiley says. "I won't call it a frenzy, because it is still very much a buyer's market. But pricing will be higher tomorrow than it is today because metrics will be better than they are today. There is no reason for pricing not to move up."
Other dealmakers say pricing pressure is part of an even larger shift in the market. Buyers are looking for targets that will add to their ability to make money long term, as opposed to chasing bargains. That strategy dovetails with the market's return to valuing bank stocks relative to their earnings, instead of their tangible book value.
"Buyers are willing to pay higher to get a strategic acquisition," says Randy Dennis, president of DD&F Consulting, an advisor in Little Rock, Ark. The firm was involved in the recent deal between Home BancShares (HOMB) and Liberty Bancshares. "There are more acquirers out there who are thinking, 'I'm not going to get another shot at this franchise, this management or team,' and they are stepping up."
Dennis and Wiley mentioned the deal CenterState Banks (CSFL) announced last week as an example of the healthy prices buyers are willing to pay; the Davenport, Fla., bank agreed to buy Gulfstream Bancshares in Stuart, Fla., for 143% of its tangible book value.
The $796 million-asset Southern Missouri is on the hunt for banks with strong deposit bases. Its loan-to-deposit ratio was nearly 102% at June 30, and it is looking for acquisitions flush with liquidity, said Andrew Liesch, an analyst at Sandler O'Neill.
Southern Missouri announced in June that it would pay $6.5 million in cash for the $80 million-asset Ozarks Legacy Community Financial in Thayer, Mo. That deal was priced at 113% of the seller's tangible book value. At the time, Matt Funke, the company's chief financial officer, said that sellers' price expectations were becoming more reasonable.
Steffens said during the conference call that Southern Missouri was hoping to strike another deal soon, but that it was committed to deals in which it could earn back the dilution to tangible book value within three years. Even with the increased competition, he is sticking to that tenet.
Even if prices begin to rise, that should be easy to do, Wiley says.
"It is hard to screw up a deal if you paid under two time tangible book and have 30% cost saves," Wiley says. "Bankers are just afraid of being second-guessed on pricing at the country club or in New York."