Bank M&A Midyear Update: Consolidation Pace Remains Lower Than Expected

Many people expected the pace of bank mergers and acquisitions in 2013 to pick up as a result of pressures from regulatory burdens, lack of growth in existing markets, and boards and management teams that had grown weary of banking.

However, deal activity for the first six months of 2013 indicates a consolidation pace consistent with 2012. The pace is ahead of 2011 and 2010 levels but still below levels seen before the credit crisis. Deal volume in 2012 was bolstered by a considerably vibrant third-quarter deal flow. Unless the same deal volume is experienced in the third quarter of 2013, the yearly deal count could slip below 2012 levels.

Credit Quality Concerns Still Affecting Deal Volume

In a survey on merger and acquisition conditions jointly conducted by Bank Director and Crowe Horwath LLP in October 2012, one of the primary impediments to consolidation reported was the credit quality of potential sellers. While current-year levels of nonperforming assets by sellers are better than they were at the peak of the credit crisis, levels are still high compared with historical norms.

* Totals are weighted averages.

History indicates that when credit problems are prevalent in the banking industry, both the number of deals and pricing are negatively affected.

Pricing for deals announced in the first half of 2013 are consistent with the overall pricing for 2012 and up slightly from the second half of 2012. Credit quality would appear to be dampening overall pricing.

* Totals are weighted averages.

FDIC Deal Volume Drops 

Although the Federal Deposit Insurance Corporation (FDIC) continues to work with institutions, deal flow for assisted transactions has diminished from its peak in 2010. Asset discounts, the bid amount for an institution divided by the assets sold, have settled in at around 16 percent, likely the result of the FDIC offering deals without the benefit of a loss-sharing agreement. The average deposit size of the institutions sold has also decreased.

Branch Deal Volume Slightly Lower Than Prior Years

Branch deal volume is on pace to be slightly lower in 2013. Deposit premiums dipped in 2012 but have rebounded back to 2010 and 2011 levels in the first six months of 2013. For many community banks, a small one- or two-branch network might be the only feasible acquisition opportunities. While deposit premiums are up in 2013, they still are at a reasonable level and in some regions are still well below the average. As larger and regional bank holding companies continue to evaluate their branch networks, there likely will continue to be acquisition opportunities available.

Possible M&A Indicators for the Next 12 Months

While deal volume has been steady these past several years, it is still at a pace well below the predictions from various industry pundits. The past two Bank Director/Crowe Horwath merger and acquisition surveys highlighted concerns about credit quality, the economy, and regulatory issues as major causes of the slowdown.

While credit quality has been improving in the industry, the levels of nonperforming assets are still high compared to historical averages. Based on the correlation between deal volume and credit quality, the overall level of nonperforming assets will need to improve significantly before deal volume will increase. Economic indicators have been improving, but there are still unknowns both in the U.S. economy and worldwide, which suggests that uncertainty is still at levels that make it difficult to do deals.

The regulatory environment has stabilized some now that regulatory agencies have taken industry concerns into consideration and revised their Basel III rules, but the overall level of concern over regulatory issues is still high. Issues implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act and the new rules from Consumer Financial Protection Bureau are challenging banks as they try to comply with the onslaught of new rules.

As a result, it appears as though bank merger and acquisition levels will remain constant and more moderate than the levels predicted over the past several years.