United Community seeks safe expansion in Miami market with First Miami deal

First Miami Bancorp Inc.'s smaller size, conservative balance sheet and Miami metro market footprint made it an attractive target for United Community Banks Inc.

Economic uncertainty and greater regulatory scrutiny have created a major slowdown in bank M&A. United Community's planned acquisition of First Miami is small enough that it does not put United Community at risk while still serving as a good starting point in a new market, Piper Sandler analyst Brad Milsaps said. It is also an opportunity to expand United Community's presence in the fast-growing Miami market, United Community Chairman and CEO Lynn Harton said in an interview.

"I think it's really the best dynamic business market in Florida," Harton said. "We had a very, very small presence in Miami already in service. This really significantly expands that presence."

Harton said First Miami's trust and wealth management focus aligns with United Community's portfolio and noted its relatively conservative loan-to-deposit ratio of 69%.

The bank, founded in 1952, reported total net loans of $530.3 million as of June 30, 2022, according to S&P Global Market Intelligence data.

"The great financial crisis was pretty tough on South Florida banks and these guys survived," Milsaps said. "That probably speaks to kind of their conservative nature."

Attractive pricing

Pricing on the deal is "pretty attractive" for United Community, Raymond James analyst Joe Yanchunis said.

At a 159.5% deal value to tangible common equity ratio, the transaction is priced slightly below the median for Florida bank deals of 186.7% since the start of 2001, and well below the 216.4% deal value to tangible common equity ratio of Seacoast Banking Corp. of Florida's acquisition of Professional Holding Corp. in 2022.

The price paid was a fair one, Milsaps said.

While the profitability of First Miami may not be as strong as that of some other banks, "there are some things that [United Community] could bring to the table, whether it be cost savings or putting some of the excess liquidity at First Miami to use and bringing the earnings up," the analyst added.

The acquisition also contributes to growing scarcity value in Miami, which should make banks like U.S. Century Bank and Amerant Bancorp Inc. more valuable as potential targets, Yanchunis said.

Future M&A

United Community has been acquisitive, making nine deals in the last seven years and adding more than $10 billion in assets during that period, according to Market Intelligence data.

In the near term, the company will focus on closing and integrating the First Miami deal, but it could make additional acquisitions later this year, Harton said. "The sellers are the ones that determine the timing, and so we just try to be as conservative as we can."

M&A challenges

A major challenge to dealmaking in the current, high-rate environment is the "punitive" hit to tangible book value buyers have to take in order to make an acquisition, especially for larger deals, Harton said.

"Over time, you get that money back, but the front-end book value is pretty daunting," the CEO said.

Buyers are even more reticent to swallow the up-front cost of an acquisition in an uncertain economy and under greater regulatory scrutiny, Harton said. Because of these concerns, U.S. bank deal volumes are at historic lows so far in 2023, Raymond James' Yanchunis said, noting that there were 172 deals in 2022, but only seven deals this January.

Because the Miami First acquisition is a smaller transaction, the impact to tangible book value is not as significant, and the deal is less likely to attract serious regulatory scrutiny, Harton said.

M&A activity more broadly is going to be "down significantly" in the near term but will eventually pick back up once the economic picture becomes clearer, he said. Harton cited fundamental drivers of M&A, including banks' needs for larger balance sheets, better technology and experienced people.

"That's going to continue to drive consolidation even if we do have this kind of short-term slowdown," the CEO said.