Buying Out Biggest Investor Shouldn't Crimp Bank's M&A Ambitions

Talmer Bancorp in Troy, Mich., still has enough dry powder for acquisitions after spending $75 million to buy out its biggest investor.

The $6.4 billion-asset company recently agreed to repurchase more than 5 million shares from funds associated with billionaire Wilbur Ross. In a related move, Ross will sell his remaining stake in Talmer to other investors.

The move, which represents private equity's latest exit from the banking sector, should boost Talmer's earning per share by reducing its shares outstanding by 7%. And Talmer, which should be able to maintain a ratio of tangible common equity to tangible assets of 10% or more through 2017, should have enough capital left for deals, industry experts said.

Talmer still had "significant flexibility to fund what we see as continued strong organic growth, consider additional M&A opportunities or entertain a possible early exit from its [loss-share agreement] with the Federal Deposit Insurance Corp.," Christopher McGratty, an analyst at Keefe, Bruyette & Woods, wrote in a research note to clients.

Acquisitions have been an important component of Talmer's growth story. The company added $6 billion in assets from making eight acquisitions since early 2010.

But an increase in earnings per share would come at an opportune time for Talmer, since investors are eager to see accelerated bottom line improvements after years of rapid growth, said Dallas Salazar, chief analyst at consulting firm CapGainr.com.

Talmer and Ross had been carefully working their way toward a complete separation.

Ross, who joined Talmer's board in April 2010, stepped down last fall. Denny Kim, who Ross tapped to replace him on the company's board, announced his resignation after news of the stock sale became public.

Talmer paid Ross about $20 million in February for warrants it issued his funds in 2010, when Ross led a group that invested a total of $200 million in the bank. Between the warrants and the stock it recently agreed to buy back, Talmer will have paid Ross about $96 million.

Ross also sold the remainder of his Talmer stake — roughly 4.6 million shares — to other investors at a $69 million gain. In all, Ross more than doubled his original investment, McGratty wrote in his note.

Representatives at Talmer declined to comment, and efforts to reach Ross were unsuccessful.

Ross said in a press release announcing the stock sales that "portfolio considerations" were responsible for his exit. "We are proud to have recognized that Talmer would quickly create a major regional bank in the Midwest," he added.

"Ross is a private equity investor," said Terry McEvoy, an analyst at Stephens. Inc., said in an interview Monday. "Their model is to get in early, take risks and realize gains. I think this is an instance of [Ross] realizing a gain after a successful investment."

"The upside to a roll-up strategy [like Talmer's] is significant, but you're definitely taking on risk," Salazar said. "To go out and see that type of gain will be applauded."

Talmer completed its most recent acquisition — a $13.4 million, all-cash deal for the $230 million asset First Huron Corp. in Bad Axe, Mich. — in February. In a July 31 conference call with analysts, David Provost, Talmer's president and chief executive, said the company remains on the lookout for additional deals.

"The level of merger activity in our market offers us the potential to further leverage our capital position," Provost said.

If a major deal were to materialize, McEvoy said there is no reason to believe Talmer would experience difficulty raising fresh capital.

"I think it could be done," he said. "They have a track record that investors trust."

Talmer is probably looking the hardest in Michigan and Ohio, McEvoy said, though he added that it is unlikely anything big is looming, given the amount of capital involved in the repurchase of Ross' stock. "If they did see a sizable acquisition on the horizon I don't think they would have repurchased that much stock," he said.

Salazar said he also believes Talmer is well-positioned heading into 2016. The company will see an increase in its risk profile as the loans it bought from other banks continue to season, but that trend is offset by minimal exposure to energy credits.

"Talmer has almost no direct energy exposure," Salazar said. "That's not common for banks of its size."