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Community banks seeing higher prices in M&A market

Although community banks appear eager to continue exploring M&A opportunities, executives at the KBW Community Bank Investor Conference said Aug. 1 and Aug. 2 that higher stock prices are making it hard to find an attractive deal.

Banks have seen their stocks rise since the U.S. election. As of Aug. 1, the SNL U.S. Bank Index had risen 28.64% since Election Day, Nov. 8. The boost in equities makes it more expensive for companies looking to make a deal. David Zalman, Chairman and CEO of Houston-based Prosperity Bancshares Inc., said M&A is "vital" but difficult to pull off when $2 billion banks are trading at 24x earnings.

"It has become harder," Zalman told investors and bankers Aug. 1.

Some say the M&A environment is particularly challenging among smaller targets.

"There are less and less $200 million potential partners," James Ford, President and CEO of Fresno, Calif.-based Central Valley Community Bancorp, said Aug. 2. At Houston-based Green Bancorp Inc., Chairman and CEO Manuel Mehos said Aug. 1 he likely won't chase any small deals for now, preferring to prioritize organic growth over scale.

But finding a small partner didn't appear to be an issue for Novato, Calif.-based Bank of Marin Bancorp, which announced July 31 its acquisition of Napa, Calif.-based Bank of Napa NA, with $246.0 million in total assets. Colombo said Aug. 1 at the KBW conference that the deal was attractive because of immediate accretion to earnings per share and new opportunities to lend to the wine industry in the Napa Valley.

"It will allow our team to have much greater exposure in the market," President and CEO Russell Colombo said.

Some companies with an appetite for acquisition say the stock bump is actually advantageous to M&A plays. At Oak Ridge, N.J.-based Lakeland Bancorp Inc., President and CEO Thomas Shara Jr. said a 2.08x price-to-tangible book value gives the bank stronger currency in potential stock deals.

"We do have the opportunity to buy some things should they become available," Shara said, adding that the company has been very selective and has turned down about 30 deals.

Olney, Md.-based Sandy Spring Bancorp Inc. is set to use its stock in a $499.6 million deal to acquire WashingtonFirst Bankshares Inc. Sandy Spring President, CEO and Director Daniel Schrider acknowledged that the closing price ratcheted up during competitive bidding, but the deal was ultimately awarded to Sandy Spring with the help of the company's higher stock price.

"Where we were trading at the end of the quarter, provided that currency, we were less focused on what the ultimate multiple was," Schrider said.