Bancorp merger – 8-10% Upside
Quick disclaimer: Trading liquidity is very limited here. However, the bid/ask spread is narrow (1-2%), and it should be possible to lock in 8-10% upside over time on small, symbolic positions.
This is a rather standard merger between two community banks. These setups used to be quite popular on SSI, especially during the 2020-2021 pandemic/post-COVID era (e.g CCSB, FNHM, LDKB, FBC, SNNY, CROL, EMPK). Such mergers are typically straightforward and have historically had a very high success rate of closing. It seems likely this current setup will follow the same pattern.
Northway Financial is getting acquired by Camden National in an all-stock merger, with NWYF stockholders bound to receive 0.83 CAC per each NWYF share held. Spread fluctuates at 8-10%. The transaction is expected to close in Q1 2025, subject to target’s shareholder approval and regulatory clearances. CAC’s borrow is available on IB at 0.5% annual rate.
The merger rationale is straightforward. Both banks operate in neighboring areas near the Maine-New Hampshire border. Northway operates 17 branches in New Hampshire. Camden National primarily operates in Maine (55 branches), but also already has 2 loan offices in New Hampshire. The combined entity will become the largest community bank in the two states (based on both on assets and deposits).
Both banks have similar loan portfolios and deposit structures. Loans are primarily focused on residential and commercial real estate – 76% of the portfolio for CAC and 85% for NWYF.
So, NWFY pretty much seems like a “natural acquisition target” for CAC.
The buyer also expects significant cost synergies. Both banks are geographically close and use the same operating system. However, due to its smaller scale, NWYF is far less efficient than CAC. NWYF’s efficiency ratio (roughly: non-interest expense divided by total income) has historically hovered around 80%-85%, compared to CAC’s high-50% range. Bringing Northway’s overheads proportionally in line with Camden’s could generate $9m in cost savings. That is quite substantial compared to the target’s $4-$5m in annual net income and $32m in non-interest expense.
The offer comes at 1.5x TBV and 19x H1’24 run-rate PE (before any synergies), which seems quite fair for a bank that has been historically generating ROE at 4%-9%. Tangible book value multiple represents a solid premium over NWYF’s historical 0.7x-0.9x TBV range, while earnings multiple also comes at the higher end of the historical range. For comparison, Mercer Capital reports that larger banks in the region are being acquired at 11-12x PE and 1.1-1.4x TBV, with ROEs between 7% and 10%.
Therefore, I don’t anticipate any issues with NWYF’s shareholder approval, especially when the target’s management holds 17% of the outstanding shares.
On the buyer’s side, shareholder approval isn’t required, while the risk of CAC walking away is minimal. Camden is getting a pretty good deal, as accounting for all the cost synergies (expected to be fully realized in 2026), the PE multiple paid for NWYF effectively stands at just 6.6x. Additionally, the buyer plans to mark down/adjust some portion of NWYF’s loans and AOCI (accumulated other comprehensive income), and then accrete them back over the next 6-9 years. That will greatly improve profitability of the combined bank, even though it will be purely due to optics.
This is also not the first deal of this size for CAC. Back in 2015, Camden successfully acquired SBM for around $130m to expand in Maine. That deal positioned Camden at the #2 spot in the state, growing its deposits by 33% (an $800m increase) and increased Camden’s branches by nearly half.
Regulatory pushback is unlikely. It’s a sub-$100m deal, and the banks operate in different states. Even combining the community bank markets of both states, the pro-forma CAC would only hold 12% of deposits and assets across Maine and New Hampshire. The markets are quite fragmented and the next largest player controls 11.5% and 12.3% (in deposits and assets across combined Maine and NH). Market share details for ME and NH banks can be found on ibanknet here and here.
So why does this situation exist? Well, as illustrated by many similar setups previously posted on SSI, it’s not uncommon for small community bank mergers to trade at attractive spreads. However, the other two factors to consider are:
- NWYF’s trading liquidity is fairly thin. The volume increased initially following the merger announcement but seems to be tightening again.
- If the merger fails, downside to pre-announcement levels could be substantial (around 30%).
A bit more details on NWYF
Historical financials and valuation:
Loan portfolio quality seems to be quite high and stable:
The bank is also apparently has the leading (lowest-cost) deposits franchise among peers, which was emphasized a lot by CAC during the merger’s conference call.
Historical financials and valuation of CAC
Just a quick glance. There also seems to be a quarterly dividend of currently 42c paid out by CAC. Next record date is Oct 15. depending on timing that might mean 2 distributions until close and narrows the spread by about a third.
NWYF shareholders are also expected to receive one half-yearly dividend of $0.35, if the deal is closed after early Feb 2025.
Yes, so dividends reduce the spread by 1%. It’s currently now at 7%.
Proxy has been released indicating that the merger is still on. The remaining spread now stands at around 5%.
https://www.bamsec.com/filing/114036124043705?cik=750686
Proxy shows shareholder meeting has been set to December 17. NWYF had a spike at the end of trading yesterday, but given how limited the liquidity is it’s hard to tell whether that was meaningful or the spread has actually narrowed. The remaining spread is probably somewhere between 4-8%.
Anyone listened to the NWYF virtual shareholder meeting on 12/17? Was the merger approved?
The results don’t seem to be released yet? I couldn’t find any updates, but the vote appeared set to pass.
Much faster than previously expected. NWYF/CAC merger is now expected to close on Jan 2, 2025.
Dec. 20, 2024 /PRNewswire/ — Camden National Corporation (“Camden National”) (NASDAQ: CAC), the bank holding company for Camden National Bank, announced today that it had received all necessary regulatory approvals to complete its previously announced proposed merger with Northway Financial, Inc. (“Northway”) (OTCQB: NWYF), the parent company of Northway Bank. The transaction is expected to close on or about January 2, 2025, pending satisfaction of customary closing conditions.
With the merger closing today and the spread now at 0%, I’m marking this yet another successful bancorp merger. ±7% return over 3 months. Liquidity was quite limited however.
@dt I assume you screened all announced bank mergers in the US.
There were many bank mergers announced every year （most of them between small banks), but only a dozen showed up on SSI pitches in the past 5 years or so.
I am curious what % of the announced deals had spreads of >8% after announcement?
And among these deals with >8% spreads, what % you passed on because of high risks?
Is limited trading liquidity/nano-cap the most typical factor driving the unusually wide spreads?
I don’t track that kind of stats, so not able to shed much light on your question. However, in terms of reasons for the spread:
– for larger bank mergers, it is often regulatory risk, which I am not able to handicap and therefore most of these never appear on SSI.
– and for smaller/nano-cap bank mergers, as you suggest, lower trading liquidity and smaller absolute opportunity size (making it uninteresting for most of the M&A desks) seem to be the core factors.
Only a few of these typically make it to SSI. Most are excluded due to factors like minimal spreads, lack of borrow, low liquidity, or additional risks such as poor financials or regulatory concerns.
– and for smaller/nano-cap bank mergers, as you suggest, lower trading liquidity and smaller absolute opportunity size (making it uninteresting for most of the M&A desks) seem to be the core factors.
Quite a few small bank mergers have blown up over the past few years the past few years due to regulatory concerns. Especially credit unions (tax-exempt) swooping up banks is something that is scrutinized – AFBI got terminated last month. See, for example: https://www.icba.org/newsroom/news-and-articles/2024/09/17/as-fdic-includes-credit-unions-in-merger-statement-following-icba-advocacy-most-americans-support-investigation-of-credit-union-bank-acquisitions .
A lot of these credit union mergers trade at large spreads (MSVB, SVVB, FFNW, GBNY). But it’s not just that; HRGG and HMST / FSUN also busted due to regulatory issues last year and ERKH looks very shaky. And that’s just last year.
I also own some of these situations every once in a while but they do blow up far more often than regular mergers. It’s a very tightly regulated industry and you are definitely taking up some regulatory risk – even with the nanocap ones.
Thanks a lot for sharing!
On exclusion due to low liquidity: I’ve been trading these SSI bank merger ideas for a while, and my observation has been that some stocks that at first look almost impossible to trade are actually tradable for very patient investors and small accounts.
Their liquidity situation is better described as irregular instead of always very low: sometimes it’s not possible to get a single fill for several days, and on some other days you can fill up your bucket.
So, I appreciate very much if, for bank merger deals that you feel interesting but have concerns about low liquidity, you could still share them with SSI members. They can be actionable for some of us at some point.
Same for exclusion due to lack of borrow: the supply of borrow for a stock can change drastically at IB and borrow can suddenly become available again.
Is it worth holding onto the CAC shares that were awarded after this takeover? Thanks.