2012 Bank M&A: Volume and Pricing Improves, Uncertainty Remains

Over the past several years, numerous pundits have predicted a wave of consolidation in the banking industry based on a number of factors, including increased cost of regulation, limited access to capital, and lack of growth opportunities, to name a few.

While the current level of uncertainty in the marketplace and the level of pricing available to sellers have kept the pace of consolidation consistent, the levels are well below the predicted tidal wave of consolidation.

Deal activity for the first six months of 2012 indicates a pace of consolidation ahead of 2011 and 2010 levels, but still well below levels before the credit crisis. The year-to-date price-to-book value (P/BV) and price-to-tangible book value (P/TBV) ratios for bank deals are improved over 2011 indexes and consistent with 2010 indexes.

M&A Deals*

Source: SNL Financial / *Excludes FDIC-assisted transactions

Uncertainty Does Not Breed Confidence

In a survey on merger and acquisition conditions jointly conducted by Bank Director and Crowe Horwath LLP in October 2011, one of the primary impediments to consolidation was reluctance to take a chance on an acquisition in uncertain economic conditions. This concern can be translated into uncertainty regarding credit quality.

History has shown that high levels of credit problems in the banking industry inversely impact the number of acquisitions closed.

To put this into more qualitative terms, buyers and sellers tend to view the levels of credit issues in different ways, and bridging the chasm between the two views has impeded acquisitions. In fact, survey respondents indicated that concern over the asset quality of selling institutions was the number one reason why they would not engage in bank acquisitions.

Lower FDIC Deal Volume

As the Federal Deposit Insurance Corporation (FDIC) continues to work with troubled institutions, the number of assisted transactions has diminished from its peak in 2010.

FDIC-Assisted Deals 

Source: SNL Financial

In addition to a decrease in the number of deals in 2012 from prior years, the average asset size of the institutions sold has also decreased. This indicates that the FDIC has resolved the issues for most of the larger troubled institutions and is now focusing on the remaining smaller institutions.

The FDIC also has been structuring more transactions in 2012 and 2011 without loss-share agreements, which were prevalent in 2010 transactions.

FDIC-Assisted Deals and Loss Share

Some of this trend can be attributed to buyers opting against having the FDIC as a future business partner, and some is the result of the FDIC not offering loss-share agreements or offering loss-share agreements on only a part of the loan portfolio. This trend likely accounts for some of the increase in the asset discount on those deals in 2012 closed with a loss-share agreement. Based on a review of recent deals, the FDIC is tending to offer loss-share agreements on commercial loans instead of on single-family mortgage loans.

It looks as though the number of FDIC-assisted transactions will remain low in 2012, with the year on track to be substantially below 2011 transaction levels.

Slow and Steady

Although overall deal volume has increased thus far in 2012, indicators still point to consistently slow activity in bank mergers and acquisitions—a far cry from the tidal wave of consolidation many had predicted. While credit is improving and the number of banks on the FDIC’s troubled bank list has decreased, the level of nonperforming loans is still higher than optimal. This higher level of nonperforming loans will continue to affect the level of bank merger and acquisition activity in 2012.