Some community banks looking at MOEs to drive future sale value

Several community banks are considering mergers of equals, with some seeing a pathway to boosting their value for a future sale to a larger lender.

Over the last few years, the number of community bank MOEs has been down from a surge of such deals between 2013 and 2016. But a pair of advisers said they have several community bank MOEs in the works, potentially setting up for a resurgence in the year ahead. Just one month into the year, one community bank MOE has been announced: Oakwood Bancshares Inc. and Maple Financial Holdings Inc.'s tie-up to create a Texas-based community bank with about $2 billion in assets. The banks did not reply to requests for comment.

Transformative deals have become more popular in banking over the last couple years as companies look to rapidly gain scale and combat headwinds such as rising technology budgets. But for some community banks, an MOE has another layer of strategy: create value for a potential sale in the future.

"A seller might have said, we've tried to sell, but maybe we had no interest or we didn't have enough interest or we got interest but not at great valuations because we weren't big enough," said Christopher Olsen, managing partner for Olsen Palmer LLC, in an interview. "So in lieu of that, let's do a merger of equals and get larger and maybe get more valuable as a potential target down the road."

Olsen said he is working on six community bank MOEs, and Tom Rudkin, a principal with DD&F Consulting Group, is currently working on two such deals.

Several banks have pursued the strategy of signing an MOE and subsequently selling for a stronger price. Among the 16 community bank MOEs announced between 2017 and 2020, three of the resulting banks ended up selling within five years.

After combining with CBT Financial Corp. in an MOE in 2017, Riverview Financial Corp. announced in June 2021 that it would sell to Mid Penn Bancorp Inc. The transaction's deal value to tangible common equity was 121.0% at announcement.

Heritage Southeast Bancorp. Inc., the result of an MOE between three Georgia-based community banks, announced in March 2021 that it would sell to VyStar CU in the largest credit union-bank deal on record after an undeniable offer, the bank's CEO told S&P Global Market Intelligence in April 2021. The deal value to tangible common equity stood at 178.1% at announcement.

And Partners Bancorp, the result of an MOE between a Virginia-based community bank and a Maryland-based community bank, announced in November 2021 that it would sell to OceanFirst Financial Corp. at a value to tangible common equity of 148.4% at announcement.

Rudkin said he is seeing growing interest in MOEs among community banks with less than $1 billion in assets.

"If you're an $80 million bank or $100 million bank, they're not going to get a market price for it. They just won't. It's too small. So that's going to bring disappointment," he said.

In 2019, 2020 and 2021, the median deal value to tangible common equity for deals involving targets with less than $1 billion in assets was below the industry median for all deals announced each year, respectively. On the other hand, deals involving targets between $1 billion and $5 billion in assets fetched higher valuations than the industry medians for each year.

While Olsen and Rudkin are working on eight community bank MOEs between them, both advisers said such deals are notoriously difficult to close.

"A lot of folks will work on them, will look at them, will entertain them," Olsen said. "Very few of those ultimately get even close to the finish line."

Determining the name and headquarters of the combined organization can be "commonly unsolvable" and deciding the go-forward management team and board can be "deal killers," Olsen said.

Still, deal conversations among community banks are surging, and the advisers do not expect M&A activity to slow down anytime soon.

"The community banking environment is challenging right now. It is certainly not unnavigable, but there are some headwinds," Olsen said. "One of the better solutions for addressing those challenges is to get larger in some form or fashion."