First Community paying up for Surrey Bancorp's deposit base, lending expertise

First Community Bankshares Inc. is paying a steep premium for Surrey Bancorp's lending expertise and deposit base as the deal ranks as one of the most expensive U.S. bank transactions announced this year.

Among the 57 U.S. bank deals announced so far this year where deal pricing was available, the tie-up between Bluefield, Va.-based First Community and Mount Airy, N.C.-based Surrey had the seventh-highest value based on price-to-tangible common equity, according to S&P Global Market Intelligence data. The $113.2 million transaction had a deal value as a percentage of tangible common equity of 206.55% at announcement. The median price-to-tangible common equity among the 57 deals examined in this analysis was 154%.

The merger carries a price-to-earnings ratio of 18.1x, compared to a median of 14x among 52 deals where that figure was available.

'Product driven' deal

While available community bank targets in the Carolinas are dwindling and, in turn, driving up scarcity value, other factors played a bigger role in the price First Community paid, executives told Market Intelligence.

During deal discussions, First Community was focused on Surrey's core deposit base as well as its competency in commercial and government-guaranteed lending, Surrey CEO Ted Ashby III said in an interview.

"I think it was more product driven," Ashby said.

First Community Chairman and CEO William Stafford II said that while the number of well-run small banks in the region is diminishing, scarcity was no more of a factor than it has been in other states where the company has made deals. Surrey's commercial and industrial and small business lending expertise, as well as its "very stellar credit quality," made it an attractive target, Stafford said.

Mutually beneficial

Both executives said the combined institution will benefit from each bank's respective areas of expertise.

Ashby said First Community has had plenty of opportunities to press forward with small business lending in its markets but "just haven't been doing it."

"We've been doing it close to 25 years," Ashby said.

For legacy Surrey customers, First Community can offer a broader suite of banking products, such as investment advisory and property and casualty insurance, along with larger lending limits for Surrey's larger customers, both executives said.

Surrey's sticky deposit base likely made it an attractive target, said Lee Bradley, senior managing director at Community Capital Advisors who advises on bank deals in the Southeast. Bradley did not work on this transaction.

"If we're going into a recession, these banks might have liquidity needs, so I think it's probably a pretty smart move for those two to join forces," Bradley said.

Future prospects

First Community remains open to future deals but will continue to be selective about pulling the trigger, Stafford said. The Surrey transaction was First Community's first bank deal announcement since 2019 and only its second in the last decade.

"We try very hard to acquire only the ones that we think will be additive to our overall strategic plan," Stafford said. "Banks and branches that are not just in the locations that are helpful, but also the people and the products and the culture of their bank is important to us."