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Are Bank Mergers Back?

 March 14, 2012 01:03 PM
 


It's no secret that 2011 was not a great year for most banks, of any size. Uncertain market conditions on top of loan quality issues and regulatory oversight left the industry as a whole in a shambles. One of the many results of the uncertainties was the fewest mergers in the sector for 3 decades.

And who could blame any prospective buyer for wanting to remain on the sidelines until things shook out? Which is what makes Mitsubishi UFJ Financial unit's UnionBanCal acquisition of Pacific Capital (PCBC) a refreshing change. A closer look at the deal makes it easy to see there will likely be other M&A interest in the sector.

[Related -BB&T Corporation (BBT): Facing Several Large Headwinds]

UnionBanCal's offer of $46 a share was 60% above the current stock price, a hefty premium over its current trading price. Assuming management isn't completely off base, financial industry investors can take some solace in the line of reasoning for the $1.5 billion decision. After re-capitalizing as recently as 2010, not a lot was expected to change in the near-term, particularly concerns regarding Pacific Capital's shaky loan portfolio. Well, here we are in the early stages of 2012 and already UnionBanCal likes what they see in terms of quality of loans. They also cited an improving economic outlook and one other hidden gem Pacific Capital has to offer.

There are these neat little accounting items called deferred tax assets; in Pacific's case these total nearly $250 million. Essentially, deferred tax assets are a means of using losses to offset future tax liabilities. Upon completion of the deal; which is expected by Q4 of this year, UnionBanCal will immediately have access to the capital to fund growth. That's a pretty strong incentive, and a major reason they were willing to pay such a premium for a bank that has consistently lost money each of the past 3 years.

[Related -Stock Upgrades And Downgrades: BBT, EW, FB, MON, MS, MXIM, MU, OXY]

On a smaller scale, BB&T (BBT) announced they are going to go through with their plans to take about $285 million in obligations for a 95% stake in BankAtlantic Bancorp (BBX). Smaller yes, but perhaps more importantly this may be the precursor of a lot more activity this year.

It doesn't take too much imagination to see other institutions that are in a position to offer suitors similar benefits. There were certainly no shortage of losses in the past few years and banks that could benefit from scale. In fact bank research firm KBW suggests there are as many 23, possibly upwards of 35, potential merger or acquisition targets in the sector. And with over 50 potential suitors banks that were once fighting for survival may finally be in a position to appease shareholders.

Texas Capital (TCBI) at $1.3 billion and Alliance Financial (ALNC), a smaller but also profitable institution, are two possible targets among the many.

The tide may be changing in the banking industry. For investors who follow the sector closely, it is really a matter of when not if. The wait may soon be over.

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