A relatively small deal in Mississippi could be the tipping point for bank consolidation.
Renasant, a $4.2 billion-asset company in Tupelo, has agreed to buy First M&F in Kosciusko for $119 million by July 1. Deals in Mississippi are rare because in-state banks have been in recovery and out-of-state buyers have had little interest in the market.
Renasant's willingness to pay a 119% premium over tangible book value is far from a windfall for the seller, but it shows how much pressure some growth-starved companies are getting from investors to deploy capital.
"The new reality is that bank stocks are no longer worth 60-70% of tangible book when buyers such as Renasant have an improved currency and need earning assets at reasonable yields," says Chris Marinac, an analyst at FIG Partners.
The deal offers a prototype for industry consolidation, he says. "Renasant needs more earning assets, has analysts seeking more earnings per share to justify its stock price and it wants to leverage its capital," Marinac says. "Buying these earning assets provides a much better yield than making new loans at ever-shrinking spreads."
It was also telling to hear Hugh Potts, First M&F's chairman and chief executive, detail how the deal came together. Robinson McGraw, Renasant's president and CEO, called to jumpstart talks.
"It was an unsolicited call from an old friend," Potts said during a conference call with analysts Thursday. The $1.6 billion-asset First M&F hired Keefe, Bruyette & Woods to "measure the deal against" comparable transactions, but it did not solicit bids.
It is unclear if First M&F would have triggered a bidding war if it held an auction. Most of Mississippi's banks are focusing on other states.
Trustmark (TRMK), in Jackson, made a statement last year by agreeing to buy BancTrust Financial Group (BTFG) in Mobile, Ala. Tupelo's BancorpSouth (BXS) has largely focused on its own recovery. And Renasant had also looked elsewhere, buying two failed Georgia banks in 2010 while pursuing de novo efforts in Tennessee and Alabama.
Outsiders also bypass the state, or make low-ball bids, because of its slow economy, fueling a belief in a "Mississippi discount."
"There's never been a stampede of M&A" in Mississippi, Potts said last fall. Though he forecast "gradual consolidation," Potts was adamant that 90% of the state's banks would be around a decade in the future.
First M&F clearly will not be among those banks, but it is unclear how open Potts was to selling when his phone rang.
First M&F had just completed a major turnaround since the Federal Reserve Board hit it with a memorandum of understanding in late 2009. It closed branches, left Florida and cut nearly 20% of its work force. Aggressive efforts to fix credit and capital issues worked; the Fed lifted the MOU last month.
"Their primary regulators would put M&F up as a poster child for what they have done in the last couple of years," McGraw said during Thursday's call, adding he feels "very comfortable" with the seller's credit profile.
Renasant will rely on old M&A economics to make the deal work. It wants to cut at least a quarter of First M&F's costs, with 40% of those cuts coming this year. Its insurance operations would double by adding First M&F.
Renasant made it clear that it will be tough to derive much revenue from First M&F's balance sheet. "There's not a lot of growth embedded" there, Kevin Chapman, Renasant's chief financial officer, conceded on Thursday's call.
That is a reality that must be setting in for a plethora of buyers and sellers.
"This strikes me as more of a cost-savings, fill-in kind of deal," says Michael Rose, an analyst at Raymond James who, like Marinac, didn't chafe at the premium. "I'm curious as to what to think of future transactions from here."