This year is shaping up to be the slowest for bank mergers and acquisitions in nearly two decades, and with many banks either hanging on to capital or wary of inheriting another bank's problem loans, the pace of dealmaking is unlikely to pick up again until late 2009 or perhaps even 2010, industry observers say.
Activity could increase in the second half of this year if banks in dire need of capital cannot raise it and are forced to sell themselves, but even then the number of deals is likely to remain well below the average of recent years. If the current pace holds, this would be the first year since 2002 in which fewer than 200 deals were announced and the slowest for bank deals since at least 1990, according to the investment bank Carson Medlin Co.
"I'm not expecting any type of pickup in the near term unless it is assisted transactions," said Brent Christ, an analyst with Fox-Pitt Kelton Cochran Coronia Waller. Many buyers are likely to stay on the sidelines until they "are more comfortable with loan portfolios and the economy starts to improve," Mr. Christ said. "But right now it is a black hole in terms of knowing what they are getting."
In the first half, 77 deals were announced, according to Carson Medlin, versus 153 in the first half of 2007.
Even deals that are being announced could collapse if the buyer's share price plummets or the buyer gets a closer look at seller's loan books and does not like what it sees.
No deals announced this year have fallen through, but more than a dozen of those announced in last year's second half have for those reasons.
The main reason activity has slackened is that many once-active acquirers have gone into a capital-preservation mode to deal with the slumping economy and the surge of nonperforming assets showing up on their balance sheets.
Also, many would-be buyers' stock prices have plunged, and raising capital by issuing trust-preferred securities has gotten much more expensive in the last few quarters.
"Capital is king right now and much harder to come by," said Brad Milsaps, a managing director in the Atlanta office of Sandler O'Neill & Partners LP. "And nobody has the currency to make deals happen. … We knew it was going to be a weak environment, but we had hoped there would be a few more deals."
As the volume of deals has declined, prices have fallen accordingly. At the end of last year's second quarter the median deal price was 2.4 times a seller's tangible book value, according to Carson Medlin. A year later the median price was 1.92 times tangible book value.
"Unless you have a reason to sell, I wouldn't sell now for a reduced price," said Dan Bass, the managing director of Carson Medlin's Houston office.
Some strong banks in growing markets such as Texas can still fetch hefty prices, Mr. Bass said.
"I am working on some now that are going to sell at last year's prices, but those banks would sell at three times book in any economic environment because they are good banks in places where people want to be," he said.
But several observers said deals at last year's prices will almost certainly prove to be the exception, not the norm, for areas with sluggish economies.
"There is no motivation to go out and pay a premium at this point," Mr. Christ said. Even Texas banks "are trying to stay relatively conservative, because they see what is going on throughout the rest of the country."
Seven Texas bank deals were announced in the first half, versus 13 in the first half of 2007. But prices are definitely higher in Texas; the median price on the deals announced year-to-date is 2.54 times book, according to Carson Medlin.
For banks that are well capitalized and have lower levels of problem assets than their peers, now might be a good time to snap up problem banks. In a May research note, Sandler O'Neill pointed out that the stock prices of banks that acquired troubled banks in the early 1990s performed better than their peers once the economy rebounded.
In the report, Sandler listed several large banking companies — including Wells Fargo & Co., M&T Bank Corp., and U.S. Bancorp — and several regionals — such as BancorpSouth Inc. in Tupelo. Miss., Whitney Holding Corp. in New Orleans, and Home Bancshares Inc. in Midland, Tex. — that it believes could best absorb problem banks.
John Allison, the chairman and chief executive of the $2.6 billion-asset Home Bancshares, said his company is keeping its eyes open for bargains.
"As the prices have come down there could be some major opportunities out there," he said. The key, of course, "is just picking the good ones."
Many small banks with high levels of delinquent loans on their books are focused now on raising capital, though some are garnering little investor interest. Mr. Bass said he believes several banks struggling to raise capital will wind up selling themselves.
"I'm shocked that more troubled bank deals aren't getting done," he said. "It's a type of deal that takes more time, so we will probably see more of that in the second half."
