Poll: Price Remains Obstacle to Deals


Brighter days are ahead for community banking, according to 68 percent of the more than 200 bank CEOs, board members and senior executives participating in a series of audience surveys at Bank Director’s Acquire or Be Acquired conference, held January 25-27, 2015, in Scottsdale, Arizona. The annual event, which focuses on bank mergers and acquisitions, was attended by more than 520 financial executives and board members, primarily bank CEOs and board members, representing more than 300 banks, the majority of which are headquartered in the central United States. Two-thirds of attendees represented banks with less than $1 billion in assets.

The crowd at the event revealed a strong focus on acquisition opportunities, with 60 percent indicating that their bank will most likely buy another financial institution in 2015, and 16 percent indicating plans to sell. The audience revealed a greater likelihood to participate in M&A in 2015 than the banking community as a whole: Bank Director’s 2015 Bank M&A Survey, conducted in September 2014 and sponsored by Crowe Horwath LLP, found that 47 percent planned to buy, and just three percent to sell, this year.

When asked about the biggest barrier for banks seeking an acquisition in today’s market, attendees cited high price expectations on the part of the seller, at roughly one-third. Attendees were also asked which part of the M&A cycle worries them most: 44 percent cited pre-deal considerations, including price and negotiating the deal. This trumps post-deal concerns, such as integration, cited by 36 percent of attendees. 

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Thirty-four percent said that many targets don’t want to sell, underscoring that confident spirit that brighter days are ahead. Potential sellers may be willing to wait it out for a higher price. While the vast majority of the audience expressed confidence that they understand the value of their bank, 40 percent revealed they are not confident that their board knows what the bank is worth. 

On stage at the event, Rick Childs, a partner in Crowe Horwath’s financial advisory services group, said that price and an unwillingness to sell on the part of the target bank really fit hand-in-glove. Many banks don’t want to sell because they expect a high price. High dollar deals—those with pricing about 2.5 times tangible book value—receive a lot of attention, but “there’s a big chunk of deals that get done for less than tangible book value,” said Childs. The expectations of board members and shareholders may not align with those of the market.

There may be more buyers than sellers, but it’s not entirely a seller’s market. A track record of growth and profitability make for a more attractive seller. Almost half of the audience at Acquire or Be Acquired revealed that their primary reason to make an acquisition is to increase earnings per share. Childs said that investors have shifted focus to earnings potential, as opposed to worrying about tangible book value dilution as much, representing a positive step for the industry. Earnings are improving for banks, and targets are more attractive. “I think it’s the right focus to have on deals these days,” he said.

So how do you grow if your bank can’t find the right target at the right price? Not surprisingly, given the audience, 82 percent of attendees said that lending is the primary path to growth for their organization. The best opportunities for loan growth are in commercial real estate, according to 58 percent of attendees. Almost one-third cited commercial & industrial (C&I) lending, and 9 percent cited residential loans.

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Commercial real estate loans have been steadily rising since the fourth quarter 2012, according to the Federal Reserve Bank of St. Louis, following a steep decline beginning in the fourth quarter 2008. C&I lending experienced a similar fall, but recovered more quickly. Recovery in the residential loan market has been unsteady.

Childs told the crowd that he sees pockets of the country where lending is picking up, as companies that were forced to live within their means during lean years look to expand and invest in their businesses. But demand hasn’t picked up everywhere. Almost half of the audience said that, aside from regulatory costs, constraints on loan growth, including weak demand, have the most negative impact on the profitability of their institution.

What’s Ahead for Bank M&A? Results of the 2014 Bank M&A Survey


2014-MA-Survey.pngIs it harder to get regulatory approval for a deal these days? Fifty-eight percent of respondents to Bank Director’s 2014 Bank M&A Survey, sponsored by Crowe Horwath LLP, believe it is more difficult than five years ago. Specifically, bank executives and directors find that regulators have increased their scrutiny on aspects of the deal such as regulatory compliance and capital adequacy.

So will the regulators impede bank M&A, preventing that long-predicted increase in deals from happening in 2014? Bankers don’t seem to think so. In fact, 76 percent of respondents expect to see more bank M&A deals in 2014. Just 7 percent expect activity to decrease.

Will Basel III have an impact on M&A deals? Forty-one percent of survey participants believe that Basel III will result in an increase in deals, while 32 percent don’t think that Basel III will impact bank M&A at all. When asked about their own bank’s strategy, 54 percent feel that Basel III will have little impact, and 29 percent are unsure what the impact will be.

The survey is based on emailed responses this fall from 231 senior executives and directors of the nation’s banks on issues related to mergers and acquisitions, specifically focusing on what challenges and opportunities face buyers and sellers in the banking industry. Bank leaders were also asked to weigh in on what they expect the environment to yield in 2014, both for the industry and for their own institutions.

So what do potential buyers and sellers have to say about bank M&A for the coming year?

Findings include:

  • More than half, 52 percent, of respondents say that their bank plans to purchase a healthy bank this year. Will their plans come to fruition? Last year, the 2013 Bank M&A Survey found that 46 percent of respondents planned to purchase a healthy bank, while this year’s survey finds that just 24 percent purchased a healthy bank in 2013.
  • What are the barriers to making a deal? Thirty-five percent say that coming to an agreement on price is the single greatest challenge their boards face when considering an acquisition or merger of equals. Potential buyers, at 63 percent, say that pricing expectations are just too high. Forty percent worry about asset quality, and 38 percent say that the boards of targeted banks just aren’t willing to sell.
  • Will more banks consider a sale in 2014? Only 5 percent of respondents indicate that they’re willing to sell a bank. There are a number of reasons that these banks won’t sell out: Forty-eight percent say that the bank’s board and management want to remain independent, and 42 percent say that current pricing is too low.
  • When asked to provide the top three reasons for selling their bank, almost half of respondents say they would entertain a sale if the bank received an attractive offer. The second and third most popular reasons for a possible sale are the high cost of regulation, at 25 percent, and limited organic growth opportunities, at 23 percent.
  • Once the deal is done, what are the most difficult aspects of the acquisition? Assessing credit quality issues at the acquired institution is cited as a challenge for 53 percent of respondents. Post-merger integration, at 45 percent, and cultural compatibility, at 43 percent, continue to be problematic for buyers. However, many respondents report that they are satisfied with some of the stickier points of the deal, like cultural fit, growth in market share and technology integration.

Download the summary results in PDF format.