Merger and acquisition activity has been in the summer doldrums … since Jan. 1.
Expectations had been high that 2011 would bring some serious moving and shaking among community banks. But the murky economy and regulatory uncertainty have discouraged buyers, turning them skeptical and picky.
"You haven't seen [M&A rise] because nobody is sure what they will make in 2012," said Rusty Cloutier, the president and chief executive of MidSouth Bancorp in Lafayette, La.
Buyers and sellers should be on the same page right about now. Operating costs are high and revenues are low, with not much hope for a turnaround in sight — plenty of reasons for a banker to want to get out. Sale prices have dropped accordingly. And yet, virtual silence.
"If I'm trying to sell a bank, the first thing a buyer asks is, 'What's wrong with it?' " said Dan Bass, a managing partner at FBR Capital Markets. Companies are already conceding that "in this environment, it is not the time to sell," he said.
At June 10 banks had announced only 65 whole-bank acquisitions in 2011. That was an 18% drop from a year earlier, according to data from SNL Financial. Activity for the second quarter has been off 43%.
Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP who once forecast that deal activity would be double what has taken place so far, said he was surprised by the overall decline.
There has been a "contamination among buyers and sellers," because of the "tremendous amount of work surrounding the new regulatory environment" and negative economic data in recent months, Fitzgibbon said.
Bass said he has noticed the emergence of a bargain-hunting mentality, with some buyers holding out until they can find banks priced so low that they will immediately pad earnings. Not wanting to be taken advantage of, some sellers are now reconsidering.
East Texas Financial Services Inc. in Tyler recently ended a six-month effort to sell itself after determining that pricing was too low. The company is now looking to remain independent, purge more bad assets and compete for commercial loans.
"Current takeout pricing for banks … was below historical levels," Derrell Chapman, East Texas Financial's president and CEO, said in a May 27 press release announcing the company's decision. "While we received a few indications of interest, all were below book value."
The numbers back the view. At June 10 the median price-to-book value for 2011 bank acquisition of 107.1% is the lowest in 21 years, according to SNL. (The median was 120.2% a year earlier.)
"Once targets do appear, it's not like the target is going to come out of this with a lot of cash to their stockholder," said Ann Lawrence, a partner at DLA Piper's Los Angeles office.
Buyers are "spending a lot of money on due diligence, and they're probably going to find a fair amount of hair on these deals," Lawrence said. "That's placing a chilling effect on the market."
Potential buyers continue to argue that sellers have unrealistic expectations.
"There are banks out there that are worth more than book value or book and a quarter … but there ain't none, in my opinion, worth two times book," Cloutier said. "There is still a Red Sea gap in the market between the buyers and sellers."
"Healthy sellers want too much, and unhealthy sellers just can't get the price to work," said Brett Rabatin, an analyst at Sterne Agee & Leach Inc. "Nobody wants to be put in penalty box … for a transaction that was viewed as [having] too robust pricing."
There have been small pockets of the U.S. where deals are taking place, such as California and the Northeast, though there hasn't been enough volume to offset virtually nonexistent activity elsewhere.
"We need a couple people to stick their necks out and do what the pundits have considered a high price deal," Bass said. "I talk to buyers all of the time who ask me to tell my clients they should sell at book value. ... I don't think two times book is an overpriced deal for a clean, high-performing bank when you look at it with a long-term perspective."
David Grinberg, who chairs the M&A practice group at Manatt, Phelps & Phillips, said banks seem to have lost "the momentum we need" to have a boost in acquisitions. "We've lost that for now," given uncertainty, he said.
That's not stopping Fitzgibbon from hoping a fourth-quarter rally could lead to higher results than the 175 deals unveiled in 2010. And he is forecasting more than 300 acquisitions in 2012.
Cloutier is in his camp. "The end of next year … will likely be when consolidation hits," he said. "It takes a while for things to sink in."
Grinberg said it is difficult if not impossible to predict the pace of bank consolidation.
"Anyone who tells me that they know what is going to happen, I immediately don't believe them," he said.