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Street Talk Episode 79: More attractive premiums for bank M&A targets coming


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Listen: Street Talk Episode 79: More attractive premiums for bank M&A targets coming

As bank M&A continues to heat up, investors could increasingly receive nice pops on their stakes in institutions selling for notable market premiums.

Bank M&A activity has increased from the severely depressed levels recorded during 2020, when economic uncertainty created by the pandemic pushed many buyers to the sidelines. Anton Schutz, president and CIO Mendon Capital, said in the latest Street Talk podcast that recently announced deals likely were in the works before the pandemic began and conversations restarted once more clarity over credit quality and the pace of the recovery emerged. But, Schutz said more frequent deal announcements are beginning to occur.

Through June 13, 45 bank deals had been announced in the second quarter of 2021, marking the highest level of quarterly activity since the fourth quarter of 2019.

Schutz said some of the more recent deals have included sizable market premiums for sellers and the investor believes more could be in the offing since larger banks trade at significantly higher multiples than their smaller counterparts, giving them a currency to offer attractive prices to sellers and still ink deals that are accretive to earnings.

"We saw a couple of very nice premium deals last week. [Community Bankers Trust Corp.] and [Select Bancorp Inc.] both sold in deals that look pretty good for their buyers," Schutz said. "And so those are good deals. They're nice premiums for the sellers. And I think they'll eventually be nice operational earners for the buyers."

The deal value in Community Bankers Trust's sale represented a one-day market premium of 42%, while the offer for Select Bancorp equated to a one-day market premium of close to 29%.

Schutz noted that some experienced acquirers currently boast very strong currencies and pointed to First Financial Bankshares Inc. and Renasant Corp., which trade at more than 5x tangible book value and nearly 2x tangible book, respectively.

"There's some really strong currencies out there," Schutz said. "What can they do? What should they do?"

The investor sees plenty of tailwinds for deal activity. Schutz said loan growth remains lackluster and is unlikely to pick up for many banks until late 2021 or early 2022. Schutz further noted that banks are currently generating plenty of capital and could leverage their strong balance sheets to pursue transactions. Bankers are also considering the prospect of higher capital gains taxes next year and potential changes in regulation further on the horizon, Schutz said.

"I think that because there's a potential tax law coming to me, the deal I paid a lot of attention to was [Eastern Bankshares Inc.] buying [Century Bancorp Inc.] That was 100% cash deal. And I saw that deal and I said, whoa! There's a message," Schutz said.

Eastern announced plans to acquire Century for $641.9 million in early April. A number of other larger deals have already come to fruition, including three mergers of equals, or MOEs, with values over $1 billion. While all transactions face hurdles, bank advisers say that social and cultural issues regularly prevent MOEs from occurring. Some advisers have suggested that social issues might not be as large of a sticking point today given the push for scale, but Schutz was skeptical that bank executives would completely push egos aside.

"I just talked to one senior exec at a company that's often mentioned in the rumor mill and his comment was, basically, you'd be shocked at the reasons deals don't happen. And I think that, that hit home," Schutz said. "Because some of these companies, you're like, why hasn't this deal happened yet? It's logical that it should happen. But logic doesn't always win. So whether it's ego or money or control, there's so many factors."

Schutz does see more banks considering transactions, however, as a means to gain the necessary scale to become more efficient and invest in technology to meet growing customer demands. The investor noted that bank customers relied more heavily on digital channels during the pandemic and that behavior is unlikely to change. Schutz also noted that banks need to have the certain products to remain competitive, whether that is superior cash management tools or offering their customers the opportunity to transfer money between friends seamlessly.

"But I will tell you, the reason a lot of these deals are happening is that need to compete with not just banks but with fintechs is real. And it's going to become more real every day," Schutz said. "And I think it's really going to be critical for the industry to adopt not just best practices, but best technology."

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