Is it possible to determine prospective sellers by looking at the attributes of current sellers?

The equity research team of Sterne Agee recently took a look at M&A so far this year, publishing a report that included 76 banks with market capitalizations of $100 million to $5 billion that exhibit similar traits to banks that are currently selling themselves.

Perhaps the most compelling catalyst for a sale among those in the group is the prices that their selling peers have fetched. The median of the 16 deals was 155% of tangible book value and 20.9% times the sellers' next 12-month earnings.

The report's group of potential sellers trade at about 130% of tangible book value. "Premiums for those who do elect to sell seem likely to remain healthy," the research team, led by Terry McEvoy, wrote in their note to clients.

The fact that existing sellers have found nice premiums is important since the list is filled with essentially average to below-average performers. Buyers are willing to pay full prices because they often see tremendous opportunity to wring out costs, leverage liquidity and juice earnings. Buyers are often well aware of likely sellers, but the list could provide context for investors looking to take advantage of takeout premiums.

The dozen traits researched by Stern Agee include a chief executive who is older than 60; more than 20% insider ownership; a return on assets less than 0.80%; a return on tangible equity below than 10%; a net interest margin of less than 3.6%; and an efficiency ratio greater than 65%. The research team also screened for year-over-year declines in areas like ROA, ROE and earnings.

The analysts found that 76 banks matched at least seven of the traits. The Mid-Atlantic led the pack, with 27 banks making the list, followed by 17 in the Southeast and 13 along the West Coast.

The list is "a quantitative approach to identifying potential M&A candidates by overlaying 12 factors common among recently acquired banks onto the remainder of the banking universe," the analysts wrote.

It remains to be seen how many of the banks will end up selling. CEOs infrequently discuss their interest in selling, beyond a typical response that nods to their responsibility to shareholders.

American Banker reached out to the 14 banks that fit at least nine of the 12 criteria, including Republic First Bancorp in Philadelphia; Sun Bancorp in Mount Laurel, N.J.; First Citizens Bancshares in Raleigh, N.C.; and CenterState Banks in Davenport, Fla.

Most of the banks declined to comment or didn't return calls. Gary Olson, CEO at ESSA Bancorp, and Thomas Vento, Prudential Bancorp's CEO, were the only executives who agreed to comment.

Both said selling is not in their plans right now.

Prudential, for instance, can't sell. It went through its second-step conversion from a mutual holding company to a stock company last year. Such companies are barred from selling for at least three years. Having said that, many choose to sell quickly after the prohibition ends, often because they struggle to deploy the capital raised in the conversion. (Sterne Agee's list has several converted mutuals, and the Mid-Atlantic and the Northeast are rife with such companies.)

Regardless of the three-year window, Vento said Prudential is focusing on the metrics that landed it on the list.

"In the next year or two, we plan to change those numbers," Vento said. "The best way to change efficiency is to increase earnings."

Like many thrifts, Prudential is trying to become more commercially focused. Vento said the $525 million-asset company has added staff and booked $63 million in loans in its fiscal year, which ended Sept. 30.

Vento, 79, added that the company has addressed succession.

"We have an excellent succession plan — we have a young guy who is our no. 2," Vento said referring to Joseph Corrato, Prudential's 52-year-old chief financial officer.

ESSA converted from a mutual to a stock company in 2007 and was clear with its investors that selling is not something it is interested in, Olson said.

"We said right from the beginning that we would take this capital and use it for the long term," Olson said. "We had a 22% capital ratio and we said we would leverage that down and that is exactly what we've done. We have no plans to call it a day."

ESSA's tangible common equity ratio was about 10% at Sept. 30. Through organic growth and acquisitions, the company has grown its assets from $1 billion at the time of its conversion to nearly $1.6 billion. Over the same time, its return on equity has gone from 1.5% to 5.6%.

"We are aspiring for an 8% ROE in about a three-year time frame," Olson said.

Like ESSA, several banks on the list have been active buyers, including First Citizens and CenterState. Those companies are using deals to help address things like efficiencies.

ESSA is looking for more deals, too. The company's stock trades at 85% of its tangible book value, and Pennsylvania has recently emerged as a hot market for transactions and pricing, so it could be hard for ESSA to find sellers willing to take cash or a deal that is not too dilutive. Still, Olson said he is undeterred.

"We've been able to do two deals in less than three years," Olson said.

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