By Ray Birch
CHARLOTTE, N.C.—What credit unions are doing for small banks looking to sell is stabilizing the price floor, according to one M&A expert whose firm has worked with more than 20 banks that have been purchased by credit unions.
Creating that stabilization in the market today for smaller community banks is critical, says Sean Enright, as the number of buyers on the bank side for these smaller sales has been shrinking.
Enright, a director at Hovde Group, LLC, an M&A and capital markets advisory firm, spoke with CUToday.info about how the number of buyers on the bank side for small community banks has been falling since these deals began back in 2011, when United FCU in St. Joseph, Mich., acquired $81-million Griffith Savings Bank in Indiana.
Enright’s comments appear here as part of a series on credit union acquisitions of banks. Enright was also interviewed as part of an earlier report in this series.
Enright explained that one of the reasons for the decline is that big banks are getting bigger, which makes smaller banks less ideal as merger targets, partly because the size disparity limits the impact on their performance and thereby their stock price.
“What credit unions are doing in the bank deal pricing market is stabilizing the floor,” said Enright.
Preventing the Slide
Stabilizing that floor prevents the shareholders of small community banks from watching share prices slide, Enright added.
“Most of your bank buyers, as they approach the $10-billion asset range, they're looking for bigger deals, driven, too, by expectations from Wall Street,” said Enright. “They want to go after a bank that is closer to or above one-billion dollars in assets. The community banks that are selling to credit unions are generally a bit smaller. I'd say the average is probably somewhere around $500 million in assets. So, I think a lot of your bank boards and investors have realized that the credit union activity helps stabilize the price floor.”
Enright said that is what his company has seen in Florida, which has been a hot market for credit union purchases of banks, where the buyers are up against certain limits.
“Your larger buyers can't afford to pay higher, because of where their stock is trading,” he said. “Or they just don’t necessarily have the interest in a smaller bank. So, then, sellers are maybe looking at a smaller bank buyer, under $2 billion in assets. But they too have a price ceiling and also can’t do all-cash deals at the higher prices that sellers are looking for.”
But credit unions can, as Michael Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP, and the pioneer of these purchases, has regularly not
ed in previous CUToday.info reports.
What the Data Show
In a previous CUToday.info report, Bell and Charlie McQueen, president and CEO of McQueen Financial Advisors, reported that data show credit unions are paying from 1.3 to 1.9 times book value for a bank. Enright notes this varies by geography, but believes the range may be a little higher in the Southeast.
“Maybe 1.75 to two times book value,” he told CUToday.info.
“When it comes to stock deals, you are really not able to buy at a price valuation that's much higher than where you trade,” said Enright. “If the buyer’s stock valuation isn’t high, it’s less attractive to certain sellers who want to take high-performing, liquid stock or maybe don’t see the value in taking an even exchange of shares at a lower price. There's also the unknown of what will happen to the stock price over the course of six months, which it typically takes to close a deal.
“So, an all-cash deal at a higher, fixed price in a market where buyers are shrinking ….,” continued Enright.
On the bank side, there is just not huge demand to buy smaller community banks, at least not at the price point they’d accept, which generally only larger, uninterested buyers can pay, said Enright.
Looking back to 2013, which Enright termed the start of the latest “M&A cycle,” he said at that time there was a longer list of bank buyers in the game.
“In Florida, there were about 20 large banks bidding on more than a few deals,” recalled Enright. “But a number of these buyers have grown substantially after several mergers, or merged with another large bank, often a merger of equals.”
Changing Expectations
That has driven the size of these banks scooping up smaller community banks, typically doubling their asset size, said Enright.
“Once they get to that $10-billion to $20-billion range, there's going to be significantly less appetite for smaller deals. That’s where the credit union activity is really helping the bank M&A market,” said Enright. “A lot of these more experienced buyers going after the smaller banks have just fallen in number.”
Enright reiterated the larger banks know Wall Street is paying attention.
“Wall Street expectations start to change as banks get larger,” said Enright. “When they make one of these deals, they want to be well-rewarded by the Street.”