NBT Deal May Signal Crucial Turning Point in Bank M&A

That much-hyped, long-delayed, all-but-certain postcrisis merger wave everybody has been expecting for years?

It may have just kicked off in Syracuse, N.Y., over the long weekend.

Two profitable hometown banks that most people have never heard of decided to strike a deal worth a couple hundred million dollars because they figure it is a good, straightforward business proposition. Alliance Financial's (ALNC) agreement to sell to NBT Bancorp of Norwich, N.Y., for $233 million is the type of deal market watchers have been waiting for and expect to see a lot more of once the economy rebounds: a generously priced deal between midsize players that is not a forced marriage.

"A lot of defensive selling is going on right now," says Martin Dietrich, president and chief executive of NBT, which has $6 billion assets and 137 branches. "This is a very proactive action on the part of Alliance."

Other healthy banks have merged this year in small deals, while the deals worth $50 million or more generally have involved banks being forced to sell for one reason or another.

West Coast Bancorp (WCBO) last month agreed to sell for $506 million to Columbia Banking System (COLB) because its hedge-fund investors want to cash out. Citizens Republic Bancorp (CRBC) is selling for $912 million to FirstMerit (FMER) because it lacks the cash to repay its federal aid. Hudson City Bancorp (HCBK) is a thrift that lacks the will and finances to become a commercial bank, so it agreed to sell for $3.8 billion to M&T Bank (MTB).

The dynamics of Alliance's sale are straightforward and old-fashioned. NBT wants to enter Syracuse, where, according to data from the Federal Deposit Insurance Corp., the 28-branch Alliance has No. 3 deposit market share.

The $1.4 billion-asset Alliance is not a desperate seller. Its return on assets in the second quarter was a fairly high 0.83%, and its ratio of nonperforming assets was 0.47%. Its shares closed at a price equal to 135% of tangible book on Friday, the last day of trading before the deal was announced.

Why sell? It is getting a good price: The deal values Alliance at 211% of tangible book. That is higher than the median 140% of tangible book paid in deals worth at least $50 million since June 2010, according to data from KBW's Keefe, Bruyette & Woods.

Alliance stockholders would be paid in shares of NBT, which should have a larger market capitalization, lower expenses and - ideally - better profits.

"You are combining two really high-performing organizations that share similar philosophies and cultures," Dietrich says. "Both organizations have good market momentum."

Market watchers are increasingly predicting that the next phase of the consolidation wave that began in the 1980s — but was interrupted by the Great Recession — will be dominated by mergers involving banks with assets of $1 billion to $10 billion buying much smaller banks.

"Bank consolidation will be primarily characterized by a consolidation to the middle," KBW analysts wrote in a research note on Sunday.