2007 First Quarter Mergers & Acquisitions Review

Transcription

1 2007 First Quarter Mergers & Acquisitions Review 2007 First Quarter The advent of 2007 brought a torrent of bank and thrift acquisitions. Eighty-one transactions were announced during the first quarter of 2007, a 47% increase over the first quarter of 2006 and the highest first-quarter number this century. Pricing for commercial bank transactions once again eclipsed the previous record set in Thrifts were a different story. Despite almost double the volume (12 announcements in 2007 versus 7 in 2006), the pricing multiples for thrift transactions were off across the board. Prices of publicly traded banks and thrifts fell as subprime mortgage woes dominated financial headlines and investor concerns about narrowing margins weighed. The SNL Bank Index fell 4% during the quarter while the Thrift Index fell 7%. Acquisition Markets The strong merger and acquisition momentum from the fourth quarter of 2006 continued through the first quarter of [Exhibit 1] The 81 first quarter transactions (69 banks and 12 thrifts) mark the secondhighest transaction total of the last thirteen quarters, and 26 more than in the first quarter of At the current pace, transaction volume could top 300 in 2007, a level not seen since Pricing multiples for commercial bank transactions exceeded the 2006 record levels in all categories. The median price to book jumped to 2.7x from 2.2x for Compared to 2006, price as a percentage of assets was up a remarkable 11% to 24% while price as a percentage of deposits soared to 29.3% from 26.2%. The median price to earnings edged up modestly from an already high 22.9x to 23.9x. [Exhibit 2] The median price to 7% tangible book for all bank transactions in the first quarter was an impressive 3.1x. Over half (53%) displayed a price to 7% tangible book value ratio in excess of 3x with a median of 3.6x for this group. The price paid on 7% tangible book metric allows comparison of deals involving sellers with significantly different levels of capital and is based on the assumption that buyers only pay a premium on fully leveraged capital. The South and West regions accounted for 57% of selling banks in the first quarter. For all of 2006, sellers were more geographically dispersed, with these two high-growth regions accounting for 40% of total bank transactions. Over half of the acquirers were publicly traded banks with median assets of $1.6 billion that used their highly-valued stock as part of the consideration. Banks in the $100 million to $500 million-asset group comprised the largest single group of sellers (46%) in the first quarter of 2007, signaling an upward shift in seller Exhibit 1 - Median Bank Acquisition Pricing Q2007 Price/Book (x) Price/Earnings (x)

2 Exhibit 2 Median Transaction Comparison Banks Thrifts Q1-07 Q Q1-07 Q Announcements Price/Book 2.71x 2.17x 2.22x 1.51x 1.82x 1.93x Price/Tang. Book 2.77x 2.28x 2.33x 1.51x 1.94x 2.02x Price/7% Adj. Book 3.13x 2.71x 2.69x 1.74x 1.92x 2.31x Price/LTM Earnings 23.9x 26.0x 22.9x 22.4x 20.4x 25.1x Price/Assets 24.0% 21.9% 21.6% 14.5% 18.4% 19.0% Price/Deposits 29.3% 25.8% 26.2% 20.6% 21.8% 26.3% asset size from 2006 when 45% of sellers were less than $100 million in assets (compared to 32% this quarter). The first quarter marked a dramatic rise in the proportion of in-market transactions. The 33 in-market transactions represented 49% of total bank transactions for the quarter compared to 31% for all of Most of the transactions in the previous three years were market expansions as acquirers sought out new high-growth markets. It s too early to say that the shift toward in-market deals is a trend. Perhaps, with pricing at such elevated levels, cost savings have become a more dominant factor in expansion strategies. As usual, California (7), Texas (7), Florida (6), Georgia (6), and Illinois (5) remained the top states reporting the most bank and thrift transactions. Massachusetts joined them in the first quarter recording six transactions as well: three bank and three thrift. In the first quarter of 2007, a mixture of cash and stock was the preferred type of consideration in half of the transactions and represented a clear premium on most measures over all-cash transactions. The three all-stock deals commanded the highest pricing. Two were among the ten largest deals: Wells Fargo s in-state purchase of Placer Sierra ($2.7 billion in assets) and Oregon-based Umpqua Holdings purchase of California-based North Bay Bancorp ($649 million). In the case of the Wells/Placer Sierra merger, the decision to use stock was likely left to the seller. Umpqua has a history of primarily all-stock transactions since De novo organizations (banks chartered in 1997 or later) continued to widen their lead (gained in 2006) on the overall market during the first quarter, garnering exceptional premiums to the overall bank market. The fifteen (15) de novos sold for a remarkable 3.6x median price to 7% tangible book and over 31% of deposits. The median prices to assets and earnings at 26.3% and 25.9x, respectively, handily beat the medians for all bank transactions. Six of the de novos were chartered in 2001 or later. The West (7) and South (6) regions dominated the de novo transaction volume. Two noteworthy observations can be extracted from the data: the median acquirer of a de novo was significantly larger ($2.6 billion) than the median for overall bank transactions and 67% of the transactions were in-market. [Exhibit 3] The largest transaction of the quarter was Spanish Bank BBVA s $10 billion purchase of the $34 billion-asset Compass Bancshares, Inc. for 4.5x tangible book. While headquartered in Birmingham, Alabama, Compass is best known for its extensive branch franchise in the high-growth metropolitan cities of Texas, New Mexico, Arizona, and Colorado. BBVA has said it plans to operate in the United States under the Compass Bank moniker and foresees further acquisitions in the United States. Rounding out the top three deals were the acquisition of Investors Financial Services ($11.6 billion) by its Boston neighbor State Street Corp. and Merrill Lynch s purchase of California-based First Republic ($10.7 billion). State Street s acquisition will make it the second largest in global custody services with $14 trillion of custodial assets, the largest administrator for hedge funds, and a key service provider to the burgeoning ETF market. Pricing was an astounding 4.9x tangible book and 28.5x last twelve months earnings. Merrill s purchase of First Republic brought increased access to the high-net-worth California markets cultivated by First Republic as well as $1.4 billion of assets under management and another $2 billion under custody. The pricing was generally in-line with the overall medians. In contrast to bank acquisition pricing, thrift pricing declined from the levels recorded in the first quarter of 2006 and the full-year However, only five of the twelve transactions disclosed full pricing data. The sellers were relatively small, with only one over $500 million in assets. All thrift sellers as a group reported a sub-par median ROAA of 0.28%, with three sellers in the quarter posting losses. [Exhibit 2]

3 Exhibit 3 De Novo Median Bank Pricing Multiples Number of de novo banks sold Q * Price/Book 2.16x 1.86x 2.46x 2.84x Price/LTM Earnings 24.7x 25.1x 28.7x 25.9x Price/Assets 20.3% 22.3% 23.9% 26.3% Price/Deposits 22.9% 27.0% 28.7% 31.1% * Excludes purchase by holding company controlled by majority owners of bank Public Equity Markets Publicly traded bank stocks as a group lost almost 4% of their value on a market-cap weighted basis, while the S&P 500 finished the quarter flat. Not too surprising given the headline coverage of the deepening sub-prime mortgage meltdown and investor angst over the possible demise of the Goldilocks economy. Banks with $1 billion to $5 billion in total assets delivered the poorest results in the quarter, declining just over 8% since year-end. This group also lagged the markets in 2006, but from a long-term perspective, has been by far the best performing index, gaining just over 140% since 2000 as compared to the overall bank stock return of 58%. Banks in this group are routinely active in the merger market and represented 27% of transaction volume in the first quarter. [Exhibit 4] Small bank stocks performed better than the larger bank stocks. Banks with assets less than $500 million finished the quarter flat, banks with assets between $500 million and $1 billion decreased only 1.6%, and banks with over $10 billion of assets fell 3.5% during the first quarter. Conclusion Bank acquisition prices continued to soar into uncharted territory in the first quarter of Activity volume likewise set a new high for first-quarter volume this century. Buyer focus broadened from new market expansion to include in-market consolidations, perhaps due to the current elevated prices. High prices likely contributed to the continued growth of mixed cash and stock consideration in deal structures during the first quarter. All of this occurred amid declining bank stock prices, the sub-prime mortgage debacle and mounting uncertainty about the strength and direction of the economy and inflation. It should be noted that the transactions announced during the first quarter began their gestation period in the fourth quarter of 2006 before many of these issues began to dominate the headlines. Whether these headwinds are strong enough to slow the volume and trim the pricing of transactions remains to be seen. But in a time of extremely attractive pricing against a backdrop of growing uncertainty, institutions should carefully consider all of their options to maximize shareholder value. 105% Exhibit 4 SNL Bank Indices vs. S&P % S&P % SNL Bank 90% SNL Bank $1B-$5B 85% 1/3/2007 1/31/2007 2/28/2007 3/28/2007

4 Mergers & Acquisitions of Banks Announced in the First Quarter of 2007 National Medians Financial Ratios Pricing Ratios Asset Equity/ Price/ Price/ Price/ Price/ Price/ Number Size Assets ROAA ROAE Book Tangible LTM EPS Assets Deposits of Deals ($000) (%) (%) (%) (x) Book (x) (x) (%) (%) ALL BANKS , By Asset Size > $5 Billion 3 11,552, $1 - $5 Billion 3 1,035, $500M - $1 Billion 9 624, $100 - $500 Million , $50 - $100 Million 11 76, < $50 Million 11 37, N/A Return on Assets > 1.50% , % < 1.50% , % < 1.00% , < 0.50% 9 109, By Region East 6 220, Midwest 7 235, North Central 9 74, South , Southwest 8 125, West , Structure of Transaction 100% Cash 15 77, % Stock 3 1,010, Mixed , Other 20 79, NA NA N/A Geographic Expansion In Market , Market Expansion , Partial Overlap 3 298, of the 69 deals were announced without some terms NA = Not Available; NM = Not Meaningful Source: SNL Financial, LC Regional definitions: East (CT, MA, ME, NH, NJ, NY, PA, PR, RI, VT) North Central (IA, KS, MN, MO, NE, ND, SD) Southwest (AR, LA, NM, OK, TX) Midwest (IL, IN, MI, OH, WI, WV) South (AL, DC, DE, KY, FL, GA, MD, MS, NC, SC, TN, VA) West (AK, AZ, CA, CO, GU, HI, ID, MT, NV, OR, UT, WA, WY)

5 Mergers & Acquisitions of Thrifts Announced in the First Quarter of 2007 National Medians Financial Ratios Pricing Ratios Asset Equity/ Price/ Price/ Price/ Price/ Price/ Number Size Assets ROAA ROAE Book Tangible LTM EPS Assets Deposits of Deals ($000) (%) (%) (%) (x) Book (x) (x) (%) (%) ALL THRIFTS , By Asset Size > $5 Billion 0 0 NA NA NA NA NA NA NA NA $1 - $5 Billion 0 0 NA NA NA NA NA NA NA NA $500M - $1 Billion 1 669, $100 - $500 Million 7 227, $50 - $100 Million 3 68, NA NA NA NA NA < $50 Million 1 29, NA NA NA NA NA Return on Assets > 1.50% 0 0 NA NA NA NA NA NA NA NA 1.00% < 1.50% 1 669, % < 1.00% 3 238, < 0.50% 7 116, By Region East 4 162, Midwest 4 190, North Central 0 0 NA NA NA NA NA NA NA NA South 2 140, Southwest 2 80, West 0 0 NA NA NA NA NA NA NA NA Structure of Transaction 100% Cash 5 244, % Stock 0 0 NA NA NA NA NA NA NA NA Mixed 2 182, Other 5 86, NA NA NA NA NA Geographic Expansion In Market 3 137, Market Expansion 7 131, Partial Overlap 2 153, NA NA NA NA NA 1 7 of the 12 deals were announced without some terms NA = Not Available; NM = Not Meaningful Source: SNL Financial, LC Regional definitions: East (CT, MA, ME, NH, NJ, NY, PA, PR, RI, VT) North Central (IA, KS, MN, MO, NE, ND, SD) Southwest (AR, LA, NM, OK, TX) Midwest (IL, IN, MI, OH, WI, WV) South (AL, DC, DE, KY, FL, GA, MD, MS, NC, SC, TN, VA) West (AK, AZ, CA, CO, GU, HI, ID, MT, NV, OR, UT, WA, WY)

6 The Best Knowledge And Experience Sheshunoff & Co. handled our business and this transaction with sensitivity, confidentiality and integrity. They knew our needs were unique and were able to assist us in finding a partner that had common values, philosophies and goals. Our customers, shareholders and management all benefited from Sheshunoff s strategy to find the best buyer. Everyone on their team is knowledgeable and conducted this transaction with total professionalism. Dean Bass Chairman & CEO Royal Oaks Bancshares Houston, TX Sheshunoff & Co. Investment Banking acted as financial advisor to Royal Oaks Bancshares Inc., Houston, Texas. Price to Tangible Book: 3.11x; Price to LTM: 35.5x; Price to Assets: 19.2% and Price to Deposits: 22.1%. Experienced Bankers Outstanding Results Merger & Acquisition * Seller Representation Buyer Representation Branch Sales and Acquisitions Exchange Rate Determinations Fairness Opinions Valuations Employee Stock Ownership Plans Tax and Estate Planning Dissenter s Rights Proceedings Reverse Stock Splits Optional Minority Stock Appraisals Strategic Planning Strategic Options Analysis Subchapter S Formations Capital Management Trust Preferred Securities * Subordinated Debt * Bank Owned Life Insurance ** Non-Cumulative Perpetual Preferred * **Insurance offered through AS Agency, LLC *Securities offered through Affiliated Bankers Capital LLC, member of NASD. New Gift Tax Law Requires Appraisals On August 17, 2006, the Pension Protection Act of 2006 was created, changing the way taxpayers claim gift deductions. Any non-cash charitable gifts exceeding $5,000 now requires a qualified appraiser to conduct the formal valuation of the contributions. The valuation experts at Sheshunoff & Co. Investment Banking have more than 30 years experience performing thousands of valuations of bank stocks. Our valuation specialists ensure you have a fair, accurate and defendable appraisal for your charitable contributions and gifts. For more information regarding your appraisals, please call (800) Via Fortuna, Suite 625 Austin, Texas PRSRT STD U.S. POSTAGE PAID AUSTIN, TX PERMIT 2849 Curtis Carpenter Managing Director phone fax