FNB + ANNB = Value Creation at a Full Price


Yesterday F.N.B. Corporation (FNB) announced the acquisition of Annapolis Bancorp, Inc., (ANNB), the Annapolis-based holding company and parent of BankAnnapolis.  The deal is an all stock transaction valued at approximately $12.09 per share, or $51 million in aggregate.  Let’s take a look at these two institutions.

FNB was rated “A+” by Institutional Risk Analytics at the end of Q2 2012.  The bank had a public data CAMELS of 1.6 as of that date.  FNB is one of the best performers in the US banking industry and has shown below-average levels of operational stress since the start of the subprime debacle and before.  Trading at a little over book value, FNB boasts a 4.5% dividend yield.

ANNB was rated “A+” by IRA as of the end of Q2 2012.  As of the close yesterday, ANNB was trading around book value.  Based on the bank’s strong rating and stable financial history, the valuation paid by FNB seems reasonable.  The public data CAMELS rating for ANNB was 1.9 as of Q2 2012.

With 9% tangible common equity (TCE), ANNB easily meets the heightened minimum capital requirements of Basel III.  The $51 million in total consideration works out to a premium of about 14% above current market and 1.34 x bank-level TCE.

You can purchase the bank ratings profile for FNB, ANNB and all other US banks on www.irabankratings.com.

In terms of value creation for the shareholders of FNB, ANNB looks like a very nice deal. The $430 million ANNB boasted a risk-adjusted return on capital or “RAROC” of almost 30%, an example of why banks in this sub $1 billion asset size category tend to have returns well above those of larger banks.  The liquidity and asset quality metrics for ANNB are good and suggest below-peer levels of operational stress.

Overall, the acquisition of ANNB by FNB looks like a transaction that will create value for the acquirer’s shareholders, but it comes at a full price.  This deal illustrates the fact that voluntary deals between well-managed banks can and will occur, but this is hardly the profile of transactions that Wall Street has long anticipated.  Troubled banks continue to have trouble getting acquired because of accounting and regulatory issues related to the ongoing housing crisis.

Chris Whalen




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