The latest U.S. bank deal termination has analysts suggesting The Office of the Comptroller of the Currency could be increasing scrutiny of all-cash deals.
Baton Rouge, La.-based Investar Holding Corp. provided a notice of termination related to its deal with Oxford, Ala.-based Cheaha Financial Group Inc. after the deal was not consummated at the close of business June 30. Analysts were mostly positive on the news since Investar will avoid a notable amount of tangible book value dilution associated with the deal, and some analysts wrote that termination implied regulators were not keen on banks deploying cash in M&A as the COVID-19 pandemic clouds the economic outlook. Investar's CEO said the company will remain interested in M&A once there is more economic certainty, and the bank will continue looking to expand in Alabama.
Investar completed a $30 million private placement around the same time as the Cheaha deal announcement. For now, the bank plans to continue focusing internally on protecting its balance sheet, maintaining strong capital levels, building reserves and looking at opportunities to improve efficiencies through technology, President and CEO John D'Angelo wrote in an email.
Investar would have entered a new market in the Oxford-Anniston, Ala., metro area, which is home to all four of Cheaha's branches. Investar still aims to expand its footprint in Alabama. Both of its branches are on the Louisiana border, and the bank plans to open more Alabama branches and potentially pursue M&A again once there is more economic clarity, D'Angelo wrote.
"We are interested in more M&A and will proceed with our stated strategy to continue growing the bank's footprint," he wrote. "It is our opinion that in future quarters there will be more economic clarity presenting merger opportunities."
While the company attributes the termination to the unpredictable economic conditions related to the ongoing COVID-19 pandemic, analysts speculate that regulatory scrutiny could have weighed on the deal.
"We suspect that [Investar's] primary bank regulator — the OCC — has been applying increased scrutiny to proposed all-cash deals generally ... given the optics of sending cash out of the bank (and the banking system for that matter) in the midst of the COVID-19 crisis (i.e., a time in the cycle when liquidity and capital are of increased importance)," Kevin Fitzsimmons, managing director and a senior research analyst for D.A. Davidson, wrote in a research note.
Ammar Samma, a senior equity research associate at Raymond James, and William Wallace, senior vice president of equity research at Raymond James, removed the deal from their modeling after the first quarter due to speculation that the OCC would not approve the deal.
"While it was not clear if Investar's decision to terminate the merger was informed by its regulators, we ultimately view the decision positively given the capital preservation in what is certainly a cloudy environment," the analysts wrote.
Fitzsimmons maintained his "buy" rating of the company, but lowered his 2020 and 2021 EPS estimates by 8 cents and 16 cents, respectively, due to the loss of EPS accretion from the deal, such as net interest margin benefit, a larger balance sheet and cost saves. But Fitzsimmons pointed to the elimination of TBV dilution and preserving capital as positive impacts from the termination, he wrote.
Stephen Scouten, a managing director at Piper Sandler & Co., also pointed to the elimination of TBV dilution as a benefit of the termination. "We think the bank may have somewhat dodged a bullet here as the deal was [about] 4.3% dilutive to TBV at the time of the announcement," he wrote.
