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Pace of Charlotte M&A reflects booming economy, willingness to pay a premium

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Pace of Charlotte M&A reflects booming economy, willingness to pay a premium

Following a string of deals in the first half of 2017, the pace of North Carolina merger announcements is not showing signs of slowing — particularly in Charlotte — the state's biggest city.

Companies are moving into the state's metropolitan markets and putting down roots in areas of projected high job and population growth, with hopes of taking market share away from larger institutions.

In a May research note, addressing a string of deals over a short time period, Sandler O'Neill & Partners analyst Robert Haderer wrote transactions have been fueled by buyers' desire to grow and enter more populous markets, like Charlotte and Raleigh, "via acquisitions of larger, profitable institutions and their willingness to pay a premium to do so."

The median price-to-tangible common equity value for the deals involving North Carolina-based targets announced this year is 185.5%. The national median is 160.8%.

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"There is now a scarcity of banks," FIG Partners analyst Chris Marinac said in an interview. "It's definitely true in Charlotte and Raleigh, and it's true for the whole state at this point. With a scarce number of banks, it's going to increase the price for the ones that remain."

Analysts have largely pointed to a stronger currency, driven by an improving economy and a bump in stock prices following the presidential election, as a catalyst for bank M&A across the nation. But for Charlotte, a stronger currency is coupled with other factors.

"There are a lot of dynamic things happening in terms of the businesses and households being formed," Marinac said of Charlotte's economic climate. "… That all is really good for supporting bank activity, both from a commercial as well as a retail perspective."

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Charlotte, and North Carolina as a whole, is dominated by big banks like Wells Fargo & Co. and Bank of America Corp. Marinac said community banks can take market share away from larger institutions, but that they "have to pick their spots."

There have been 10 North Carolina deal announcements since the beginning of the year, with three Charlotte targets — more than any other city in the state. Out of the nine deals, only four are in-state buyers. There were no Charlotte-based deals in 2016, and only one deal with a Raleigh target.

Select Bancorp Inc. is the latest company to tack its name onto the growing list of banks expanding into Charlotte. On July 21, the Dunn, N.C.-based company announced plans to acquire Premara Financial Inc. in a deal valued at $40 million. As it edges toward $1 billion in assets, the company has also opened branches in other populous areas, like Raleigh and Wilmington.

During the second quarter of 2017, four North Carolina bank deals were announced in an eight-day time period, kicking off a trend of increased M&A in the state.

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"Banks, in a lot of respect, are built to be sold, and eventually, they have a useful life as independent companies," Marinac said. "It just happened that this year, there were several companies where that useful life kind of ended at the same time."

Banks like Memphis, Tenn.-based First Horizon National Corp. and Columbia, S.C.-based South State Corp. are crossing state lines to dig into Charlotte's lucrative market.

First Horizon National announced May 4 a $2.20 billion cash-and-stock deal for Charlotte-based Capital Bank Financial Corp. — marking the largest acquisition of a North Carolina-based bank since Wells Fargo's purchase of Wachovia Corp. in 2008. South State, which already had eight branches in the metro area, announced April 27 plans to buy Charlotte-based Park Sterling Corp. in an all-stock deal valued at $690.8 million.

Marinac said Charlotte's economy, bustling from an influx of tourists and retirees, is a major catalyst for the number of merger announcements. "Banks are a mirror of the communities they serve," he said. "Those markets are growing."

By 2022, residents in the 55 to 69 age bracket are expected to account for 15.84% of Charlotte's population, up from 12.31% in 2010 and 14.59 in 2017, according to SNL data. Average household income is expected to increase from $86,323 to $93,957 in 2022 — up from $74,752 in 2022 for the state as a whole. The state's current unemployment rate is at 4.2%.

In an interview, Bob Morgan, president and CEO of the Charlotte Chamber of Commerce, said population growth is a "circular deal."

"We're enjoying a cost of living that is 95% of the national average, our population is large and growing, and it's a skilled workforce that knows how to make things and run businesses," he said. "The job growth is either chasing or creating the growth in population, particularly [with] young people who are moving to Charlotte."