January 30 will mark the kick off of Bank Director’s 22nd annual Acquire or Be Acquired Conference at the Arizona Biltmore resort in Phoenix. Although he is not the architect of record—that distinction belongs to the lesser known Albert Chase McArthur—the famed Frank Lloyd Wright is generally credited with designing the iconic structure, and it bears his formidable imprint. We’ve held many of our AOBA conferences at the Biltmore (and at the Phoenician resort in nearby Scottsdale), and both venues have given us a front row seat on history.
By my count, this will be the 15th AOBA event that I have attended and the architects of countless M&A deals have spoken there. Interestingly, the number of U.S. banks and the number of AOBA attendees have had a dichotomous relationship over that period of time. The conference has gotten bigger—this year we are expecting over 900 attendees, which would make it the largest ever—while the number of banks has gotten smaller. There were approximately 12,000 depository institutions in 1994—the first year of the conference—compared to just over 6,000 today. While we would love to take full credit for driving that dramatic level of consolidation, the Acquire or Be Acquired conference has at least provided tens of thousands of attendees with important information to make one of the most important decisions of their business lives.
I don’t believe that any single trend or event has had a greater impact on the industry since 1994 than the long wave of consolidation, with the possible exception of the 2007 to 2008 financial crisis. Of course, those two dynamics—consolidation and the crisis—are intertwined, as I’ll get to in a moment. Consolidation has created a bipolar industry of extremes. According to SNL Financial, the nine largest U.S. banks hold about 44 percent of the country’s banking assets, the other 6,000-plus institutions hold the balance.
The impact of this great disparity between the biggest of the big and everyone else has been profound. It was out of a deep well of concern about the systemic risk posed by the country’s largest financial institutions (including investment banks, insurance companies and other giant non-bank financial companies) that Congress passed the Dodd-Frank Act of 2010, which greatly increased the regulatory burden for all institutions regardless of their size. Compared to the Big Five, community banks and larger regionals pose very different public policy challenges in such areas as regulation, capital adequacy and risk—although this distinction isn’t fully reflected in the reality of the laws or regulatory attitudes that impact the industry today. With the exception of Citigroup, which has never been a significant factor in the domestic M&A market other than its historic 1998 merger with the Travelers Group, four of the Big Five—JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and U.S. Bancorp—are products of consolidation. You can see a personalized history of bank M&A in any of their family trees.
In recent years, the bank M&A market has settled into a steady if somewhat measured annual reduction in the number of banks. There were 225 healthy bank deals in 2013, according to SNL Financial, for an average price to tangible book value (P/TBV) of 123.3 percent. Two years ago, there were 285 deals for a P/TBV ratio of 141.1 percent. And in 2015 there were 284 deals for a P/TBV ratio of 144.9 percent, reflecting a slight increase in pricing if not in activity, according to data from SNL. That’s a far cry from 1994 when there were a record 524 deals for an average P/TBV ratio of 171.5 percent, but there aren’t as many banks to sell today as there was 22 years ago.
Much of the M&A activity in recent years has been driven by community banks and their regional counterparts since institutions with $50 billion in assets or greater—which are considered to be in a different class by the regulators—have largely been barred from doing acquisitions. There are signs, however, that some of these players are getting back in the game, evidenced by the recent announcement that $71 billion asset Huntington Bancshares would acquire $25.5 billion asset FirstMerit Corp. for $3.4 billion.
Generally, the Acquire or Be Acquired conference is an opportunity for bank CEOs and their directors to gain knowledge about the mechanics of bank M&A. It is not a place where most people come to do deals, although I did have a CEO tell me recently that a contact he made at a past conference lead to an acquisition. So not only has AOBA been a witness to history, occasionally, it helps make it.