At 74, William Farber had no desire to lead the turnaround of his distressed bank.
"We could have survived it, but it was just going to be such a long haul," said Farber, a former chief executive of Comm Bancorp Inc. in Clarks Summit, Pa. "At my age, I wasn't interested in that. I wanted to retire."
A few directors and large shareholders were at similar crossroads. So last year Comm hired Sandler O'Neill & Partners LP to find out if there were any banks interested in buying it.
There were. The $652.8 million-asset company received a handful of bids, and accepted the highest — a $70 million cash and stock offer, about 1.25 times Comm's tangible book value — from F.N.B. Corp. in Hermitage, Pa.
Like Farber, other bankers are getting antsy about the future and are often finding that the most appealing option is to sell to another institution. Their banks are emerging from the doldrums of credit problems, but a rebound could take years. The prospects of growing revenue are dim as loan demand remains weak and regulatory changes threaten to clip fee income. For bankers, the potential workload looks exhausting.
Another motivator for sellers this year is a return of premiums. Valuations are still short of pre-recession levels but are recovering as credit quality stabilizes.
"The cost of being in the banking business is going up," said Wesley Brown, a managing director of St. Charles Capital in Denver.
"There is the compliance [and] the fear of where your revenue is going to come from," Brown said. "With declining loan balances, you have more securities that are yielding nothing. Truthfully, there are a lot of bankers that are just pooped … and don't have the energy to deal with the future."
F.N.B.'s acquisition of Comm closed late last year. Stephen Gurgovits, F.N.B.'s CEO, said that he has since received calls from other would-be sellers gauging his interest in buying them. "The sellers are motivated as we are starting to see prices firm up," he said. "Two banks recently called and said, 'We think it is time to partner up.' "
Gurgovits passed on those banks, but he said F.N.B. remains on the hunt. "We looked at them, and they didn't have much to offer us," he said. "I'm not going to use all my bullets in the first round."
Comm's sale was one of the 176 transactions announced last year, excluding terminated deals, according to SNL Financial. The deal values totaled $12 billion.
That was better than 2009, the slowest year for deals on record, when 122 deals, valued at $1.38 billion, were announced.
In mid-2010, the tide shifted. Deals brokered by the Federal Deposit Insurance Corp. began to lose luster as prices for failed banks became more competitive and loss-sharing became less enticing. Meanwhile, smaller banks began to worry about their ability to go it alone after the passage of the Dodd-Frank Act. Since then, activity has picked up. If 2010 was the year buyers returned, this is shaping up to be the year sellers come to the table in earnest.
In October, KBW Inc. announced the promotions of Scott Anderson and Joseph Berry Jr. to newly created roles as co-heads of the depository investment banking practice, in expectation of a pickup in dealmaking.
Anderson said he is hearing "tremendous" chatter. "If what we are seeing in activity manifests into actual deals, we are expecting a sizable increase over last year."
Berry tempered the excitement. "There will be more deals in 2011 than there were in 2010, but not as many as there will be in 2012."
According to SNL Financial, the median value for the 34 deals unveiled in the first quarter was 1.07 times book value, down from 1.08 in 2010 and on par with 2009. April's deals had a median value of 0.95 times book value.
Individual valuations run the spectrum. On one end, Opus Bank in Redondo Beach, Calif., in March agreed to buy Cascade Financial Corp. at 37.21% of the seller's book value. By contrast, Brookline Bancorp Inc. in Brookline Village, Mass., last month agreed to buy Bancorp Rhode Island Inc. in Providence for 1.93 times tangible book value.
The median valuation was 2.15 times book value in 2006, the peak of the last decade.
A major hurdle to deals in recent years had been a fear of mispricing an acquisition. But pricing banks is easier than a year earlier as more asset writedowns have shed light on an institution's actual health.
"They have one more year behind them," said John Blaylock, an associate director at Sheshunoff & Co. Investment Banking. "They might have a few scratches and dents, but it has come to a point where you can price it appropriately."
Time has not just healed credit quality. It has also helped ground sellers' expectations. "The rearview mirror has a very faint image of past pricing," Blaylock said. "Bankers are looking for a price that they believe is fair. For the most part, they are reasonable about their expectations."
While the multiples of past years might be a faint memory, the reality of raising capital at a discount is stark. Perhaps the most logical reason banks are willing to sell now is that selling at a modest premium is better for shareholders than a highly dilutive stock raise.
Mark Bradford, a former president and CEO of Monroe Bancorp in Bloomington, Ind., said his company needed to raise capital due to credit issues. Monroe was the biggest deposit holder in Bloomington, the home of Indiana University.
"We felt that we had been aggressive in addressing our issues and were undeserving of our 50% of tangible book valuation," Bradford said. "We were confident that a buyer, given the opportunity to complete due diligence, would be able to confirm a valuation at a significant premium to market."
Monroe hired Howe Barnes Hoefer & Arnett and, in October 2010, Old National Bancorp in Evansville, Ind., agreed to buy the $800 million-asset company. Old National paid $83.5 million, or 1.5 times tangible book value. The deal closed Jan. 1.
Though some deals have premiums, Berry said buyers might get a steal. "This a great opportunity to build a deposit franchise at a very low price," he said.
Deals that involve a premium may spur more deals. "With the deals that are being announced, I think more banks are starting to think, 'Well, we look a lot like this institution or that one,' " said James Ryan, Old National's the director of corporate strategy. "They think, 'If I can get that price, I'm probably a seller, too.' "
Deals with stock considerations are gaining popularity, since sellers can share in the buyers' success and buyers can preserve capital and retain capacity for more deals. Old National paid for Monroe entirely in stock. There were 34 deals that included some element of stock in 2010.
"We like to use as much stock as possible, versus diluting our tangible equity," Gurgovits said. "When we are negotiating, I tell people, 'You should think of this as you are consciously making an investment in our bank.' "
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access