Michigan dealmaking is going high-end, but Talmer Bancorp is still shopping the sales rack for bargains.
Banks in Michigan, which is on the economic rebound, suddenly command some of the highest premiums around. Buyers are bidding up prices to about 1.8 to two times their tangible book value. The national average was 1.49 times of tangible at the end of the second quarter.
Yet Talmer Bancorp, the once-tiny bank that private-equity financier Wilbur Ross overcapitalized to buy failed and distressed banks, announced last week it would acquire First of Huron Corp., in Bad Axe, Mich., for $13.4 million in cash, or 1.17% its tangible book value.
"It is a great in-market deal that is appropriately priced," David Provost, chief executive of the $5.6 billion-asset Talmer, said in an interview. "It is a tuck-in, wasn't a competitive process and is true to our disciplined approach to M&A. Pricing is all over the board in Michigan. Anywhere between one and two times tangible book and we are very happy to look at appropriately priced transactions."
Unsurprisingly, First of Huron comes with some baggage its high-priced peers don't have, namely problem assets that equal 6% of total assets. But Talmer is experienced in working out problems. It completed several failed-bank deals and has also bought the banking operations of two bankrupt holding companies in recent years. In fact, First of Huron is Talmer's first traditional, open-bank deal.
"First of Huron has some hair on it, but it shows that there are still some select opportunities to buy banks like this," said Chris McGratty, an analyst at Keefe, Bruyette & Woods. "Also, Talmer has developed a core competency in dealing with problem assets."
McGratty said he likes the deal because it deploys some of Talmer's excess capital, it expects cost savings of 35% and expects to earn back the tangible book value dilution in less than two-and-a-half years. Three to five years has become the standard earn-back period for most transactions. The market liked the deal, too. The stock is up 5% since the deal was announced after the market closed on Aug. 6.
To be sure, Talmer is buying on the cheap because it doesn't have the currency to compete in processes like the one completed recently for Founders Financial in Grand Rapids, Mich. Talmer's stock trades at about 140% of its tangible book value. By comparison, Old National Bancorp, the successful bidder for Founders, trades at closer to 170%.
Provost said Talmer wasn't invited to bid on Founders.
"It was too rich for us," he said.
Companies like Talmer, those established or retrofitted to be roll-up vehicles for private equity, find themselves in a thorny situation in M&A. They have capital to deploy on deals, but most sellers are seeking stock. And the roll-up companies typically don't have the strongest stocks because of their capital position, but also because of the cloudiness of their earnings given things like the accounting treatment for failed-bank assets.
The goal, McGratty said, is that deals like the First of Huron one will bridge the currency gap.
"They are priced out of the real frothy stuff, and that is OK because they have to do some work on their valuation," McGratty said. "They can't and they won't go out and pay two times because shareholders won't be happy with them. So you stick with transactions like this ... and you hope the market rewards you so that in the future you can look at clean bank platforms."
Provost said he is pleased so far with Talmer's valuation improvement since its February public offering. The stock opened at $13 and now trades closer to $14 per share. He added that the valuation should continue to improve as the company continues to produce strong core earnings.
For instance, in the second quarter, the company had core operating earnings of 19 cents per share, compared with analysts' consensus of 13 cents. Additionally, it saw improvements in its efficiency ratio and reported loan growth of 3.25% from the first quarter, including covered loans. The ability to offset the burn-off of covered loans with new loans is crucial for banks like Talmer.
"We are happy with our currency so far," Provost said, adding that the company could do stock deals. "We are receiving a lot of inbound calls from sellers interested in partnering with Talmer."