M And A Activity May Catalyze Upside in Regional Banking - Tom Mitchell - Miller Tabak + Co., LLC
February 6, 2012 - The Wall Street Transcript has just published Southeast and Midwestern Banks Report offering a timely review of the Banking sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Tom Mitchell, Senior Analyst at Miller Tabak + Co., LLC, began in the industry as a Research Analyst with NYSE firm Mabon, Nugent & Co. in 1973, for which he covered consumer and commercial finance companies, credit card companies, and large multi-industry companies encompassing major insurance and financial subsidiaries. He also managed a firm account, investing in distressed situations, reorganizations and bankruptcies. In 1983, Mr. Mitchell joined New York investment management firm Weiss, Peck & Greer as one of five Portfolio Analysts, with primary coverage responsibility for the financial stock sector. As a General Partner of Weiss, Peck & Greer from 1984 to 1990, he also initiated programs for the firm to invest in foreign stocks, and to use index futures and options for bona fide portfolio hedging. In 1990, Mr. Mitchell branched out to set up an independent money management shop, Thomas Mitchell Management Co., Inc., and has managed individual and institutional accounts for the past 16 years. He rejoined the sell side at Miller Tabak in July 2006, with primary coverage responsibility for banks, REITs and other financial stocks.
TWST: What form is the consolidation going to take? Is it going to be regional or are the majors going to be players?
Mr. Mitchell: I think they're out of it. Even the deals that Wells Fargo (WFC) and JP Morgan (JPM) did and Bank of America (BAC) did at the height of the crisis or close to it really were - they were distressed deals. It's something like . . .
TWST: Yes, they're government sponsored.
Mr. Mitchell: Yes, government-sponsored distressed deals. So it's something like a Washington Mutual or a Wachovia. I don't see those kinds of transactions reemerging unless we have another round of really dismal economic activity. So I think that they're out of it. But there are a lot of banks that are under $1 trillion in assets that still could get a lot bigger. We just used $1 trillion in assets as sort of a benchmark. I've been early in calling for this consolidation to happen, so I'm repeating myself over something I felt would have already started happening by now. But that was partly because I thought the economic picture would have improved enough that the industry would be a good deal more confident of its asset values.
Right now, I don't think that it has improved enough. But I think that we will see that emerge, and I think that it'll be good for the industry, that there will be very healthy process at work. We used to say that you could go to the downtown of every town you went to, and there would be four banks at the exact intersection of the town's two most important streets, one on each corner. Maybe it's down to three, but I think it could go to two very easily, and still have both businesses and consumers get the services they want or need.
TWST: Do banks have the balance sheets to do this?
Mr. Mitchell: Some of them do, and where they don't actually have the balance sheets all by themselves, certainly mergers of equals are reasonable. Remember, it's not just balance sheets. A bank that sells at a premium to its tangible book value, they're already a minority. But if you sell at a healthy premium to tangible book value, and you go on and buy somebody else at close to or a very small premium to tangible book value, it's accretive. So from that point of view, it doesn't really matter so much how terribly strong your balance sheet is if you price the deal right. And you mark the new assets in exactly the same way as you already mark your own assets, so that there is no drift in what standards you're using to say this is what the loans are worth, this is what the nonperforming assets are worth, and so on, as far as you're using the same standard.
So yes, there are pitfalls, but there are opportunities. I think that most banks, many banks, that we have talked to have been waiting for the FDIC to become more active in putting distressed merchandise back into the market. It seems three or four of the banks that we've talked to in different parts of the country have suggested that the FDIC is sort of sitting on merchandise, waiting for things to get better to some extent that otherwise could allow for more consolidation sooner. Of course, nobody wants to go out and pay a premium for somebody else, and then find out that they could have done an FDIC-assisted deal instead. So that is probably to a certain extent affecting the psychology of banks, because every bank that's interested in making acquisitions is interested in not being left out if that opportunity comes up.
We think that there are plenty of banks that sell at decent multiples to their tangible common equity, sell at good premiums such that it would be relatively easy to make acquisitions for stock, of banks that sell at either discounts to tangible book value or fairly close to it. So I think that there is already some tiering in valuations that will favor acquirers, and at the same time there are opportunities for sellers to get premiums to where they're trading. There's enough room. There's enough banks out there that are selling at 75% or 80% of tangible book value, and enough banks trading at 140%. There is a business-transfer arbitrage here. The one with the higher valuation could use stock to buy the other one for a 25% premium to market, which would look pretty good to a lot of bankers right now.
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