We asked bank attorneys across the country what they thought about the outlook for M&A in the upcoming year, and in general, the prediction is a modest increase in acquisitions. The rising costs of regulation and slim net interest margins should pressure more small banks to sell, they say.
Are you expecting bank M&A activity to increase, decrease or remain the same in 2013, and why?
There has been more bank M&A activity in 2012 than there was in 2011, and I expect that this trend will continue. This activity will almost certainly continue to be concentrated in small and mid-sized transactions (whether of whole banks or separate business lines) rather than in much larger deals. Banks are under increasing pressure on a variety of fronts including rising regulatory compliance costs, higher capital requirements and declining net interest margins. These factors are driving healthier banks to look to acquisitions to generate synergies, build strategic franchises and increase profits. At the same time, this environment is driving weaker banks to look for an exit. Assuming no external shock to the system, this combination together with converging pricing expectations on the buy and sell sides should continue to fuel greater M&A activity in the coming year.
— William Taylor, Davis Polk & Wardwell LLP
Bank M&A was fairly stagnant in 2010 and 2011. Early in 2012, we saw a bit of an uptick, mostly resulting from troubled institutions giving up and selling to avoid ongoing regulatory pressure. However, as we began the fourth quarter of 2012, there has been much more interest on both the buy and sell side. Based on empirical evidence only, it appears that buyers are concerned that cleaner community banks are going to be snapped up by others, so now is the time to purchase. There seems to be an air of uneasiness that if those interested in growth by acquisition don’t get started, they may miss out. This attitude, coupled with the regulatory environment, which is making it difficult for smaller community banks, savings and loans and thrifts to profitably survive, is fueling what should be a very active 2013 M&A environment.
—Susan Zaunbrecher, Dinsmore & Shohl LLP
Dodd-Frank’s structural ramifications portend further consolidation in the banking industry. Small banks need to grow by acquisition or be acquired themselves in order to achieve sufficient economies of scale to make the costs of an ever-increasing regulatory burden acceptable. Medium-sized banks have similar motivations, but they also want to acquire smaller institutions in order to make themselves bite-sized for large banks. Large banks, in turn, would like to enjoy the artificial subsidies that both Ben Bernanke and the Bank of England’s Andrew Haldane have recognized are enjoyed by institutions perceived to be too-big-to-fail. If not already large enough to join the exclusive club, they will want to make further acquisitions in order to achieve that goal. This will play out over the next decade. Whether we will see significant M&A activity as early as 2013 depends on a number of factors, such as the extent of the economic recovery and the impact on the U.S. economy of developments in Asia, the Middle East and the European Union.
—Keith Fisher, Ballard Spahr LLP
We expect to see continued M&A activity, at the same or slightly increased level, compared to the past few years. For one reason, the survivability of many institutions has passed the question mark point, and now sustainability is at the forefront. Acquirers can have greater confidence in the book value they are acquiring (i.e., they can move forward without placing their institution at risk). There are also significant additional regulatory burdens that make it harder and more expensive for smaller institutions to comply and thrive. Moreover, the squeezing of the interest rate margins that will continue for the next two years will place a premium on volume. Stability in the market, which seems to have arrived, is also conducive to deal making. Finally, Basel III rulemaking could drive further consolidation.
—John Gorman, Luse Gorman Pomerenk & Schick, PC
Bank M&A activity in 2013 will depend on several developments or trends, not all of which favor bank M&A. On balance, we expect M&A activity to increase modestly. The economy in general and the banking sector in particular appear to be stabilizing. A number of banks have cleaned up their balance sheets, making their portfolios easier to value. As the economy grows, high-performing banks are beginning to consider expansion, and, in many cases, acquisitions may be the most efficient way to do so. Notwithstanding the increase in both potential sellers and potential buyers, however, acquisition prices are at roughly book value, which may deter some potential sellers.
On the regulatory side, we expect many of the most important Dodd-Frank rules to be finalized in 2013. The costs of the attendant regulatory burdens, which may be significant depending on how the final rules turn out, may reduce the earnings of small banks to a greater degree than larger banks. The comparative disadvantage for smaller banks may incentivize these banks to sell.
—Henry Fields and Dwight Smith, Morrison Foerster LLP