Monroe Securities Inc., an investment banking firm in Chicago that specializes in community banks, had this report on community banks in the Southeast:
The first quarter saw a marked improvement in bank trading multiples, as evidenced by an increase in the region[‘s] average price to tangible book ratio. The Southeastern Independent Bank Review (SIBR) average increased to 0.78X [times book value], from 0.66X in the fourth quarter, the largest increase since 2002. The broader surge in the market was helped by perceived improvements overseas as well as the Federal Reserve’s announcement that most banks passed [the] latest round of “stress tests.”
Although investors have been rewarding banks for positive earnings, more emphasis continues to be placed on the ability to control asset quality. Investors see decreases in the NPA [non-performing assets] ratio as an indication of a bank’s ability to maintain positive earnings, through a reduction in the possibility of future period write-offs. We expect that as asset quality continues to improve and banks continue to remain profitable, valuations will trend upward.
Size still matters as banks need to be big enough to weather any potential economic “storms.” However, profitability and (to a greater extent) asset quality are key in the eyes of investors. This should not come as a surprise, especially for the Southeastern region, which has been particularly affected during this recession.
Merger Activity on the Rise?
So far this year we have seen an uptick in deal activity nationally, as 49 deals were announced in the first quarter. Pricing multiples were on the rise [in the Southeast] as well, as the average price to tangible book value was 1.24X compared to 1.00X in the fourth quarter. High priced transactions in the Northeast and Southwest regions led to the increase. Banks receiving higher multiples were characterized as having low NPA ratios (less than 2%), strong capital, and above average profitability. In the Southeast, sale price multiples are improving but infrequently exceed tangible book values due to higher overall NPA levels. We believe increased merger activity shows that bankers are increasingly beginning to realize the need to pursue strategic growth opportunities, rather than wait for the return of mid-2000 level deal values that may never materialize.
For a full copy of the report, click here: