If last week is any indication, merger and acquisition deals are finally kicking into gear at community banks.
At least five companies announced acquisition agreements last week, including the $22 billion-asset People's United Financial in Bridgeport, Conn., which plans to pick up a struggling New York company and a healthy one in Massachusetts.
It was one of the busier weeks for dealmaking this side of the economic collapse. And though analysts say it might be too early to call it a breakthrough for open-bank deals, it is certainly a start.
"The M&A cycle is going to pick up. It is kind of like microwave popcorn. Deals have been few and far between," said Rick Weiss, an analyst with Janney Montgomery Scott. "Kernels start popping and then all of sudden they are popping all over the place. I don't think we are there quite yet, but the microwave is certainly turned on."
Why now? Although each of the deals announced last week had its own wrinkles, generally, regulatory pressures and market conditions are combining to bring sellers to the table. Also, buyers have been waiting for the right time and the right price — and these five acquirers think they found that.
"The entities selling now are selling for a reason," said Dan Bass, managing director of investment banking at FBR Capital Markets. "There's been a lot of pent-up demand." Bass said the days when deals were priced at several times book value are long gone. But for Gerald Mulligan, president and chief executive of the $907 million-asset LSB Corp. in North Andover, Mass., the pricing is much better than his alternative.
LSB announced Thursday that it was selling to People's United for $96 million in cash, 1.53 times LSB's tangible book value. Mulligan said the company began seeking options when it realized that it would have to sell stock at 80% of tangible book value to raise growth capital.
"We looked at selling equity, but it would have been significantly dilutive to our shareholders," Mulligan said in an interview Friday. "Either sell equity at discount or get a nice premium for our shareholders? That is exactly the equation we considered."
The impending financial regulation overhaul also was a factor in the decision, Mulligan said. "We are not selling because of the expected regulatory burden," he said. "As we looked out, we saw it as an added cost that will be increasingly hard to cover. We didn't see an ability to expand our margin that greatly to cover the costs."
Other banks are selling because of more immediate regulatory pressure: enforcement actions resulting from their souring credit quality and thinning capital.
People's United's $60 million deal for the $2.43 billion-asset Smithtown Bancorp in Hauppauge, N.Y., appears to be a case where the seller is looking for a savior. At the end of the second quarter, Smithtown's bank unit was only adequately capitalized and nonperforming assets made up 11.5% of the total.
Jack Barnes, interim president and CEO at People's United, seemed undaunted by those ratios.
"Given our size and our experienced workout staff, we are very confident we can work though those issues," Barnes said in a conference call with investors Friday. Pricing may have also helped as People's United is buying Smithtown for 50% of its book value.
Analysts expect deals similar to the one for Smithtown to make up the bulk of M&A in coming months.
Another deal announced Friday involved a struggler: the $173 million-asset Bank of Currituck in Myock, N.C., announced it would sell to the $3.6 billion-asset TowneBank in Suffolk, Va., for $10 million cash.
Bank of Currituck was only adequately capitalized as of March 31. In April the Federal Reserve gave the bank 60 days to develop a capital plan.
Buyers' willingness to consider acquiring struggling banks — rather than waiting to pick them up in failure in deals assisted by the Federal Deposit Insurance Corp. — likely stems from stabilizing credit trends, even if problem assets remain high.
"Balance-sheet stability has improved, and the visibility into the future has gotten a little bit better," said Chip MacDonald, a partner with Jones Day in Atlanta.
Essentially, the market is no longer in a free fall and buyers not only can see a bottom, they can look beyond the problems, said David Darst, a senior analyst with the investment bank Guggenheim Partners. "As problems continue to trend lower, buyers can begin to see some of the franchise value in some of the strugglers," he said. "And they are at a point where they can appropriately price the risk."
Also fueling interest in struggling banks is the competitive landscape for failed banks, which has led to less attractive pricing, particularly in the Southeast.
The other pending deals announced last week include the $95 million-asset Grandpoint Capital Inc.'s announcement Wednesday that it would acquire the $336 million-asset First Commerce Bancorp in Encino, Calif., with Los Angeles-based Grandpoint paying $4.50 a share, plus other consideration based on future results.
Also Wednesday, the $4.5 billion-asset BancFirst Corp. in Oklahoma City said it would buy the $135 million-asset Union National Bancshares Inc. in Chandler, Okla. The price was not disclosed.
On Thursday, Florida Bank Group Inc. in Tampa, with assets of $843 million, announced an all-stock deal for buying the $150 million-asset Anderen Financial Inc. in Palm Harbor, Fla..
Weiss said that although interest is picking up, buyers are still cautious and are hunting for just the right target.
"I think we will see more deals, but they are all looking for that one-plus-one-equals-three scenario," he said.