TheStreet) -- A small deal last week could be a great sign for bank investors if strategic M&A really is revving up for a return to the sector.
On June 29, privately held
Eastern Bank Corp.'s agreed to acquire
Wainwright Bank & Trust
(WAIN) for roughly $163 million. While that number isn't particularly substantial in the grand scheme of things, the $19 per share cash consideration for Wainwright's stock was a 98% premium to the prior session's close, and a 105% premium to the target bank's tangible book value, according to
Historically, paying two times book value for a strategic acquisition to expand market share is not a very high premium, but in this market the deal looks very expensive. Spokesman Joe Bartolotta told
TheStreet that Eastern Bank viewed the deal as "not a financial transaction but a strategic one" and aggressively pursued it.
>>>Imagining the Next Wave of Bank M&A
The two banks' branch networks compliment each other very well, Bartolotta added, noting that Eastern Bank would seek further expansion to fill in other gaps in its retail network, either by opening new branches or more acquisitions.
Eastern Bank had $6.6 billion in total assets as of March 31, while Boston-based Wainwright had $1 billion in assets, so Eastern Bank will be about 15% bigger if the deal closes in the fourth quarter as expected. The combined bank would operate more than 90 branches in eastern Massachusetts.
While it may have made sense for the community-focused Eastern Bank to pay twice the market price for a well-capitalized and profitable competitor to expand in its preferred market, the deal might not be a trend setter, since there are so many other reasonably healthy banks priced close to book value.
does become a bigger factor in the next year or so, as some analysts have already hypothesized, the profile of the Wainwright deal -- relatively small-scale, complimentary footprint, no major holes in the balance sheet, and the ability to pay an eye-popping premium because of depressed valuations -- may provide the blueprint for future transactions.
Out of 959 publicly traded U.S. banks and thrifts -- excluding those traded on the Pink Sheets -- for which the data was available from
, about two-thirds were trading below tangible book value at the end of last week.
Narrowing down potential prey for regional expansion to banks and thrifts with total assets between $1 billion and $10 billion, 263 names fit the bill, and 122 of those closed below book value on July 2.
Potential acquirers would tend to steer clear of banks and thrifts with capital shortfalls, or high levels of nonperforming assets, since the
Federal Deposit Insurance Corp.
is still offering loss-sharing agreements to acquirers of most failed banks. So it's better to wait and pick up a failed institution, rather than buy an operating bank with big problems and be on the hook for significant loan losses.
For bank holding companies, the nonperforming assets ratio includes loans and securities in nonaccrual status or past due 90 days or more (less government-guaranteed balances) and repossessed real estate. For thrift holding companies, the nonperforming assets ratio is for the main thrift subsidiary.
Considering all of this, we narrowed down the list of potential low-cost targets among bank and thrifts stocks selling below book value last week to 10
institutions that don't owe bailout funds and have less have nonperforming asset ratios below 4%.
One of the names on the list made its public debut in January, and would presumably not be seeking to do a merger any time soon, but if an acquirer came calling with sweet 100% premium offer, they'd probably be tempted, so we're including them anyway:
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