At 74 years old, William Farber was not interested in leading a turnaround of his distressed bank.
"We could have survived it, but it was just going to be such a long haul," says Farber, former chief executive officer of Comm Bancorp Inc. in Clarks Summit, Pa. "At my age, I wasn't interested in that. I wanted to retire."
Industry experts say Farber is among scores of community bankers who are getting antsy when contemplating the future. As banks start emerging from the doldrums of credit problems, they are faced with a rebound that could take years.
The prospects of growing revenue are dim as loan demand remains weak, and fee income is under attack from changes to the way banks levy overdraft charges and interchange fees.
For plenty of bankers, the potential workload just seems exhausting.
"The cost of being in the banking business is going up. There is the compliance. There is the fear of where your revenue is going to come from. With declining loan balances, you have more securities that are yielding nothing," says Wesley A. Brown, managing director of St. Charles Capital in Denver. "Truthfully, there are a lot of bankers that are just pooped from everything that has happened and don't have the energy to deal with the future."
Farber says that a few members of his board and large shareholders were at similar inflection point. So last year the company decided to hire Sandler O'Neill to see if any buyers might be interested. They were.
The $652.8 million-asset company received a handful of bids, picking the highest-a $70 million cash and stock offer, priced at about 1.25 times Comm's tangible book value, from F.N.B. Corp. in Hermitage, Pa. The deal closed at the end of last year.
Since then, Stephen J. Gurgovits, CEO of F.N.B., says that he has received calls from other banks gauging his interest in buying them.
"The sellers are motivated as we are starting to see prices firm up," Gurgovits says. "Two banks recently called me and said we think it is time to partner up."
Gurgovits ultimately passed on those banks, but says he is still on the hunt.
"We looked at them and they didn't have much to offer us," Gurgovits says. "I am also not going to use all my bullets in the first round."
The F.N.B.-Comm deal was one of the 176 deals announced in 2010, not including those that were terminated, according to SNL Financial. The deal values totaled $12 billion.
In 2009, there were 122 deals announced, valued at $1.38 billion. By both measures, it was the slowest year for deals on record.
Around the middle of last year, the tide shifted. Deals brokered by the Federal Deposit Insurance Corp. began to lose their luster as pricing became more competitive and the loss-sharing agreements became less enticing. At the same time, smaller banks began to worry about their ability to go it alone following the passage of the Dodd-Frank Act.
Since then, activity has been slowly picking up.
In October, KBW Inc. announced the promotions of Scott R. Anderson and Joseph S. Berry Jr., to newly created roles as co-heads of depository investment banking practice, in anticipation of even greater acceleration in dealmaking.
"The chatter we are hearing is tremendous," Anderson says. "If what we are seeing in activity manifests into actual deals, we are expecting a sizable increase over last year."
Berry, however, tempers Anderson's excitement in forecasting. "There will be more deals in 2011 than there were in 2010, but not as many as there will be in 2012."
If 2010 was the year the buyers returned to the market, 2011 is the year when the sellers come to the table in earnest.
At the crux of the readiness to strike a deal is the return of the premium.
Valuations are nowhere near what they were in the years prior to the recession, but they are on the mend as credit quality has stabilized or is at least less bad than what it was.
According to data from SNL, the median valuation for deals announced so far in 2011 is 1.34 times book value, compared to a median of 1.08 times book value last year and par for 2009.
The median valuation had been 2.15 times book value in 2006, the peak of the last decade.
One of the major hurdles to deals in recent years had been the fear by buyers of mispricing an acquisition.
Even famously acquisitive banking veteran Jay Sidhu expressed such reservations,.
In February of 2010, Sidhu, now the head of the capital-flush Customers Bank in Phoenixville, Pa., said in an interview that he was skittish on traditional acquisitions because of the uncertainty of credit quality.
"You might get one of those banks at 75 percent of tangible book value, but the problems could turn out to be so significant that you really paid two times its book value," Sidhu said.
But John Blaylock, an associate director at Sheshunoff & Co. Investment Banking, says pricing is easier from the perspective that another year of asset write-downs has provided clarity of the true health of an institution.
"They have one more year behind them. They might have a few scratches and tents, but it has come to a point where you can price it appropriately," Blaylock says.
Time hasn't only helped credit quality, though. It has helped seller's expectations.
"The rearview mirror has a very faint image of past pricing," Blaylock says. "Bankers are now looking for a price that they believe is fair. For the most part, they are reasonable about their expectations."
While the multiples of year past might be faint, the current reality of raising capital at a discount is stark. Perhaps the most logical reason why banks are willing to sell now is because an acquisition at a modest premium is a better deal for shareholders than a highly dilutive stock raise.
Mark Bradford, former president and CEO of Monroe Bancorp in Bloomington, Ind., says that his company needed to raise capital because of credit quality issues. Despite the issues, Monroe held tremendous value. At 118 years old, its Monroe Bank unit was the largest deposit holder in Bloomington, home of Indiana University.
"We felt that we had been aggressive in addressing our issues and were undeserving of our 50 percent of tangible book valuation," Bradford says. "We were confident that a buyer, given the opportunity to complete due diligence, would be able to confirm a valuation at a significant premium to market."
Monroe hired Howe Barnes Hoefer & Arnett and in October 2010, Old National Bancorp in Evansville, Ind. announced it would acquire the $800 million-asset Monroe for $83.5 million, paying 1.5 times Monroe's tangible book value. The deal closed on Jan. 1.
Although the deals are priced at a premium to tangible book value, Anderson and Berry say buyers might be getting a steal.
"This a great opportunity to build a deposit franchise at a very low price," Berry says. "Before the cycle, you made the deal work based on the cost saves."
Sellers are also looking to share in the potential synergy, with more deals calling at least partially including stock. Such deals give the sellers the benefit of sharing in the success of the buyer. Old National's acquisition of Monroe was an all-stock deal, while F.N.B.'s acquisition of Comm was a cash-and-stock deal.
There were 34 deals that included some element of stock in 2010. Analysts say more stock deals are likely because they are palatable to both buyers and sellers. For sellers, stock in an consolidator gives them upside potential. For buyers, stock deals allow them preserve capital and give them the capacity for even more deals.
"We like to use as much stock as possible, versus diluting our tangible equity," Gurgovits says. "When we are negotiating I tell people you should think of this as you consciously making an investment in our bank."
Industry players say that deals that involve a premium will only beget more deals.
"With the deals that are being announced, I think more banks are starting to think, "Well, we look a lot like this institution or that one'," says James C. Ryan, executive vice president and director of corporate strategy for Old National. "They think if I can get that price, I'm probably a seller, too."
