First Community Bancshares Inc.'s deal for Peoples Bank of Virginia is a textbook example of the kind of deal that can get done in a dismal M&A market.
The Bluefield, Va., company's agreement to pay $40.6 million for the $286 million-asset Peoples should be cheap, manageable and immediately lucrative.
It is the $2.2 billion-asset First Community's first deal since it raised $19 million of fresh capital last year primarily for the purpose of buying banks.
First Community would get $246 million of deposits and four branches in Richmond, an attractive market where it already has two branches. The deal would add about $181 million of loans, which would roughly double the size of First Community's loan portfolio in Virginia, according to an analysis by Keefe, Bruyette & Woods Inc.
The deal, should it close as expected in the second or third quarter, would be accretive within a year thanks to ample cost savings and other factors, the companies said.
First Community expects to eliminate 40%, or more than $2 million, of Peoples Bank's annual expenses. First Community does not need to raise money to close the deal and expects to be able to restore the dilution to equity it creates within a reasonable three to four years.
Most importantly, it gives First Community a meaningful toehold in the highly desirable Richmond market. Its existing 55 branches are concentrated along the Blue Ridge Mountains in North Carolina, Virginia, West Virginia and Tennessee. The combined company would be the 10th-largest Virginia-based banking company in the Richmond market, the press release announcing the deal Friday said.
The pricing is also reasonable. It values Peoples Bank at 104% of its tangible book value. That is higher than the median 92% tangible book multiple in the 37 whole bank transactions announced last quarter, according to data from investment bank Sheshunoff & Co.
But a price of around one times tangible book is a good price for an institution such as Peoples Bank that operates in a dense market and has a ratio of nonperforming loans to total loans of 3.29%. A ratio in excess of 4% is considered high; less than 2% is very good.
The credit mark of 9% that First Community is booking is relatively high, but it is not considered excessive.
The deal benefits Peoples Bank in several key ways.
Its chairman, William H. Pruitt, is to join the board of First Community. Peoples' chief executive, James H. Atkinson, "will remain involved" in an unspecified role at the combined company and several other Peoples' executives would take assume leadership positions, First Community said.
Peoples Bank shareholders are being paid 68% in stock, which is good for them for two reasons. They do not have to immediately pay taxes on those shares. First Community's shares also pay a dividend, and can be sold to public investors, which creates some liquidity options for stakeholders in Peoples Bank, a private institution.
First Community's president and chief executive, John Mendez, in a news release called the 10-year-old Peoples a "strong, well-capitalized and profitable franchise in one of the most attractive banking markets in the United States." It reported earnings of $2.1 million in 2011, more than double its profit from a year earlier, according to Federal Deposit Insurance Corp. data.
First Community said Peoples' shareholders would receive $6.08 in cash and 1.07 First Community shares for each share owned. Shares of First Community fell 4.7% on Friday, to $11.86 apiece.
Sandler O'Neill and Partners, L.P., advised First Community, and Davenport & Co. advised Peoples. Legal counsel was provided by Bowles, Rice, McDavid, Graff and Love in Charleston, W. Va., and LeClairRyan in Richmond.