Bank Valuations: What You Can and Can’t Control

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The Federal Reserve’s decision to pause interest rate increases in June 2023 gave markets hope that the period of rapidly rising rates had ended. “The fact that they paused likely indicates we are near the top,” says Patrick Vernon, senior manager, advisory services at the consulting firm Crowe LLP. But he notes that no one knows for sure whether more rate increases could come.

For financial institutions, this moment has provided a breath of fresh air. Rising rates have cut into bank valuations as bond portfolios went underwater, and investors grew more concerned about an uncertain economy. High-profile regional bank failures, including Silicon Valley Bank and First Republic Bank, further fueled concerns. 

But, for bank directors evaluating their own organization’s valuation, a chaotic environment highlights a simple fact: Many of the external factors that impact a bank’s valuation can be out of leadership’s control. Instead, it requires understanding what the business can plan for and protect against to improve valuation figures. With that awareness, leaders can determine the best way to respond when the unexpected occurs. (To understand more about the metrics that drive a bank’s valuation, click here.)

“What’s driving the decline in multiples — uncertainty of the future or the probability of a recession?” asks Scott Gabehart, chief valuation officer at BizEquity, a technology platform for business valuations. “What’s the impact on the bank’s profitability? As GDP growth goes, so does bank profitability and therefore, value.”

The interest rate environment provides a great example of this balance between what you should expect management to control and what it cannot. 

According to Bank Director’s 2023 Risk Survey, conducted in January, 91% of executives and board members cited interest rate risk as an area of heightened concern, up markedly from 2022. No surprise there, since the federal funds rate increased by roughly 500 basis points since March 2022. For many banks, the bond portfolio has taken a significant hit. Fixed rate assets declined in value as interest rates increased; newer bonds pay a higher rate. Most banks can hold onto the lower yielding bonds until they mature, but a bank that has to sell the bond would record a loss. Acquirers would want to pay less for targets with these assets on their books.

If a bank doesn’t have to sell, then it won’t lose money on the bond’s face value — or the amount the bond would return at the end of its term. For most banks, “it’s paper losses not actual losses,” says Vernon.

A bank may see its valuation shift based on its bond portfolio. But if it has done an effective job of managing assets, then it will likely play a smaller role in the valuation. Asking management for an understanding of the resources available to cover different liquidity concerns within the business will provide an indication of how well it can manage its responsibilities.  

Another area that’s primarily out of the hands of bank management, particularly for an organization looking to be acquired: deflated M&A pricing. This impacts the amount another bank would pay for the business. 

Valuation has a direct connection to what the bank would earn if an acquirer bought it. If another institution will only pay a certain price, it can have an impact on the bank’s value in the market, perceived or otherwise. “Bank stocks trade at lower multiples, and the public market sets the tone for M&A pricing,” says Jeff Davis, managing director of the financial institutions group at Mercer Capital.

The number of bank acquisitions dropped in 2022, according to S&P Global Market Intelligence, and only 32 such deals had occurred through May 2023. Deal value also dropped from 154.3% deal value to tangible common equity in 2022 to 130.6% as of May.

Lower multiples for public stocks and lower valuations for would-be sellers are driving the M&A decline in the bank sector, says Davis. These valuations have suffered due to long-duration bonds and loans made during the lower rate environment. Banks don’t want to sell at depressed prices, preferring to “wait to see if rates fall and public market valuations increase,” says Davis. 

For boards discussing their M&A prospects, directors should know the value of the bank to ensure they do not sell at a time when acquisition prices are depressed — or so they don’t pay too much for a target if they’re the acquirer. The current environment does allow for banks open to buying distressed targets to look for a deal on an acquisition. In doing so, the bank can possibly expand through acquisitions — and at a discounted sales price. 

One of the best ways that banks can control their valuation is to have a plan as the economy moves forward. Whether markets struggle or surge, having a strategy to grow assets, loans and profitability will improve the valuation.

“What are the bank’s plans for maintaining the asset base and/or expanding it?” asks Gabehart. “The focus should be on the future. What can be done to improve the metrics of the bank and profitability?”

Expecting management to have a plan for such scenarios can ensure the organization has a way to respond, no matter what outside forces bring. 

Tactics like diversification can ease the impact of stress in other areas of the business. For instance, mortgage demand has suffered due to rising interest rates. Questioning how the bank can improve its product and service offerings could add new avenues for growth and improve the bank’s valuation.

Or, if the organization has a robust fintech arm, then the bank’s valuation could remain stronger in the current market, since there’s less threat from interest rates on the fintech space, says Vernon.

Asking management how the bank will seek areas of strength can give directors insight into how executives view the future. 

Board members cannot escape the outside forces that affect the bank. But protecting the balance sheet ensures that business doesn’t halt when rates rise or other economic forces batter the bank — improving its long-term value. 

Resources
For more information about the metrics behind bank valuations and why it matters, read the first part of this series, “What Drives a Bank’s Valuation?” 

The cover story in the second quarter 2023 issue of Bank Director magazine, “Banking’s New Funding Challenge,” focuses on the rising interest rate environment and its impact on deposits. The Online Training Series library also contains information about understanding and managing interest rate risk. 

Bank Director’s 2023 Risk Survey, sponsored by Moss Adams LLP, surveyed 212 independent directors, CEOs, chief risk officers and other senior executives of U.S. banks below $100 billion in assets to gauge their concerns and explore several key risk areas, including interest rate risk, credit and cybersecurity. Members of the Bank Services Program have exclusive access to the complete results of the survey, which was conducted in January 2023.

How One Bank Transformed Its Board & Shareholder Base in 6 Years

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The McConnell family has had a controlling interest in Pinnacle Financial Corp., based in Elberton, Georgia, since the 1940s. But over the past few years, Jackson McConnell Jr., the bank’s CEO and chairman, has worked to dilute his ownership from roughly 60% to around a third. “It’s still effective control, but it’s not an absolute control,” he says.

McConnell, a third-generation banker, has seen a lot of family-owned banks struggle with generational change in ownership as well as management and board succession issues, and he’s seen some of it firsthand when Pinnacle acquires another bank. It’s a frequent problem in community bank M&A. In Bank Director’s 2023 Bank M&A Survey, 38% of potential sellers think succession is a contributing factor, and 28% think shareholder liquidity is. 

“One of the things that I’ve experienced in our effort to grow the bank [via M&A is] the banks that we’re buying … maybe the ownership is at a place where they would like to liquidate and get out, or the board [has] run its course, or the management team is aging out,” he says. “And they end up saying the best course of action would be to team up with Pinnacle Bank.” 

There’s not another generation of McConnells coming through the ranks at $2 billion Pinnacle, and he doesn’t want the same result for his bank. “I want to make sure that I’m doing everything that I can to put us in a position to continue to perpetuate the company and let it go on beyond my leadership,” he says. Putting the long-term interests of the bank and its stakeholders first, Pinnacle is reinventing itself. It’s transitioned over the past few years from a Subchapter S, largely family-owned enterprise with fewer than 100 owners to a private bank with an expanded ownership base of around 500 shareholders that’s grown through M&A and community capital raises. As this has transpired, Pinnacle’s also shaking up the composition of the board to better reflect its size and geographic reach, and to serve the interests of its growing shareholder base.

Pinnacle is a “very traditional community bank,” says McConnell. It’s located in Northeast Georgia, with 27 offices in a mix of rural and what he calls “micro metro” markets, primarily college towns. It has expanded through a mix of de novo branch construction and acquisitions; in 2021, it built three new branches and acquired Liberty First Bank in Monroe, Georgia — its third acquisition since 2016. 

The bank’s acquisitions, combined with three separate capital raises to customers, personal connections and community members in its growing geographic footprint, have greatly expanded the bank’s ownership. 

But McConnell says he’s sensitive to the liquidity challenges that affect the holders of a private stock, who can’t access the public markets to buy and sell their shares. “We’ve done several things to try to provide liquidity to our shareholders, to cultivate buyers that are willing to step up,” McConnell says. “You can’t call your broker and sell [the shares] in 10 minutes, but I can usually get you some cash in 10 days. If you’re willing to accept that approach, then I can generally overcome the liquidity issue.” Sometimes the bank’s holding company or employee stock ownership plan (ESOP) can be a buyer; McConnell has also cultivated shareholders with a standing interest in buying the stock. The bank uses a listing service to facilitate these connections.

“We have a good story to tell,” McConnell says. “We’ve been very profitable and grown and have, I think, built a good reputation.”

The board contributes to that good reputation, he says. During one of the bank’s capital raises, McConnell met with a potential buyer. He had shared the bank’s private placement memorandum with the investor ahead of time and started his pitch. But the buyer stopped him. “He said, ‘Jackson, it’s OK. I’ve seen who’s on your board. I’m in,’” McConnell recalls. “That really struck me, to have people [who] are visible, [who] are known to be honorable and the type of people you want to do business with … it does make an impact.”  

The current makeup of Pinnacle’s board is the result of a multi-year journey inspired by the bank’s growth. Several years ago, the board recognized that it needed to represent the bank’s new markets, not just its legacy ones. And as the bank continued to push toward $1 billion in assets — a threshold it passed in 2020 — the board became concerned that the expertise represented in its membership wasn’t appropriate for that size. 

“If we wanted to be a billion dollar bank, we needed a billion dollar board,” says McConnell. The board started this process by discussing what expertise it might need, geographic areas that would need representation, and other skills and backgrounds that could help the bank as it grew. 

The board also chose to change its standing mandatory retirement policy to retain a valuable member. While the policy still has an age component, exceptions are in place to allow the bank to retain members still active in their business or the community, and who actively contribute to board and committee meetings. 

But there was a catch, says McConnell. “We said, ‘OK, we’re going to do this new policy to accommodate this particular board member — but for us to do this here and make this exception, let’s all commit that we’re going to do a renewal process that involves bringing in some new board members, and some of you voluntarily retiring.’” The board was all-in, he says. “I had a couple of board members approach me to say, ‘I don’t want to retire, but I’m willing to, because I think this is the right way to go about it,’” he recalls.

Conversations with directors who still view themselves as contributing members can be a challenge for any bank, but McConnell believes the board’s transparency on this has helped over the years, along with the example set by those retiring legacy board members. Over roughly six years, Pinnacle has brought on nine new board members. That’s a sizable portion of the bank’s outside directors, which currently total 10.

McConnell leveraged his own connections to fill that first cohort of new directors in 2016. The second and third cohorts leveraged the networks of Pinnacle’s board members and bankers. McConnell has had getting-to-know-you conversations with candidates he’s never previously met, explaining the bank’s vision and objectives. But he’s also transparent that it may not be a fit in the end for the individual or the board. “We talked openly about what we were trying to do, and also openly about how I might end up recruiting you, only to say, ‘No,’ later,” he says.

Director refreshment is an ongoing process; Bill McDermott, one of the independent directors that McConnell first recruited in 2016, confirms that the board spends time during meetings nominating prospective candidates for board seats.  

Both McConnell and McDermott say the diversity of expertise and backgrounds gained during the refreshment process has been good for the bank. Expansion into new markets led to bringing on an accountant and an attorney, as well as two women: a business owner and the chief financial officer of a construction company, who now make up two of the three women on the board.  

New, diverse membership “adds a lot of energy to the room. It’s been very successful,” says McConnell.

To onboard new directors, there’s a transition period in which the new directors and outgoing board members remain on the board for the same period of time — anywhere from six to 12 months — so sometimes the size of the board will fluctuate to accommodate this. 

It can take new directors with no background in banking time to get used to the ins and outs of a highly regulated industry. That’s led to some interesting discussions, McConnell says. “There is some uneasiness and awkwardness to some of the questions that get asked, but it’s all in the right spirit.” 

External education, in person and online, helps fill those gaps as well. McDermott says the board seeks to attract “lifelong learners” to its membership.

One of the factors that attracted McDermott to Pinnacle was the bank’s culture, which in the boardroom comes through as one built on transparency and mutual respect. “I was just attracted by an environment where everybody checked their egos at the door. The relationships were genuine,” he says. “[T]hat kind of environment, it’s so unique.” And he says that McConnell sets that tone as CEO.

“There is lively discussion,” says McDermott. “Jackson encourages people to ask thoughtful questions, and sometimes those thoughtful questions do lead to debate. But in the end, we’ve been able to synthesize the best part of the discussions around the table and come up with something that we think is in the best interest of the bank.”

Additional Resources
Bank Director’s Online Training Series library includes several videos about board refreshment, including “Creating a Strategically Aligned Board” and “Filling Gaps on Your Board.” For more context on term limits, read “The Promise and the Peril of Director Term Limits.” To learn more about onboarding new directors, watch “A New Director’s First Year” and “An Onboarding Blueprint for New Directors.” For more information about the board’s interaction with shareholders, read “When Directors Should Talk to Investors.” 

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, CEOs, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly mergers and acquisitions. Bank Services members have exclusive access to the complete results of the survey, which was conducted in September 2022. 

What 2022’s M&A Market Practice Can Teach Banks

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Nelson Mullins reviewed 43 publicly available merger agreements for bank mergers announced in 2022 to identify common market practices. The transactions ranged in deal value from $10.1 million to $13.7 billion, with a median deal value of roughly $136 million. They reflected average pricing of 1.6x tangible book and 16x earnings.

Understanding these market practices can help potential targets understand what might be available in the market, and help potential purchasers understand where they may be able to stand out from the market. Below are some of the highlights and observations of the review.

Adjustments to Merger Consideration Based on Closing Capital
Ten of the 43 transactions included an adjustment to the merger consideration based on the target’s closing capital, with nine including a dollar for dollar decrease in merger consideration based on the target missing a stated closing capital level. Only one merger agreement offered a dollar for dollar increase or decrease based on a stated closing capital level. Transactions varied with respect to whether changes in the value of available-for-sale securities were backed out of closing capital as well as whether transaction expenses were to be included or excluded in such calculations; there was no market consensus. At least one merger agreement also required the held-to-maturity securities portfolio to be marked-to-market for purposes of calculating closing capital. Only eight transactions provided a minimum capital amount as an explicit closing condition.

Closing conditions predicated on minimum capital amounts are more common in years in which financial stress overhangs the industry, such as during the 2008 financial crisis. Given the significant interest rate moves in 2022, these observations are expected. As we look to 2023, we would expect these conditions to become less common if interest rate trends moderate or even stabilize and drop, noting that any asset stress resulting from a possible economic downturn would change our opinion.

Other Adjustments to Merger Consideration
Although there has been discussion of similar provisions, only the TD Bank Group/First Horizon Corp. agreement included additional merger consideration if the transaction was delayed based on delayed regulatory approvals. No other public merger agreements included such a provision. However, there was one agreement that interestingly provided that the parties could mutually agree to reduce the merger consideration by up to $3.5 million if an event caused a material adverse decline in the value of the transaction. One has to wonder: Would a target ever subsequently agree to a discretionary reduction in merger consideration?

Must the Purchaser Act in the Ordinary Course of Business?
In roughly a third of the transactions, the purchaser undertook an affirmative covenant to only act in the ordinary course of business. This would presumably require the purchaser to obtain the target’s consent before engaging in another acquisition. Conversely, in two-thirds of the transactions, the purchaser made no such covenant.

In all transactions, the purchaser did covenant not to undertake any action that would be expected to cause a delay in the immediate transaction. In the two transactions where the target was closest in size to the purchaser — hence more likely a strategic merger or “merger-of-equals” — the purchaser and target agreed to mutual affirmative and negative covenants.

Target’s Ability to Accept Superior Proposals
Virtually all of the transactions permitted the target’s board of directors to respond to unsolicited alternative proposals. This arrangement, commonly referred to as a “fiduciary out,” is common and effectively required under most frameworks of director’s fiduciary duties.

In roughly 75% of the transactions, the target board of directors had the right to terminate the merger agreement if confronted with a superior proposal and conditioned upon paying a termination fee. However, in 25% of the transactions, while the target board of directors could change its recommendation to shareholders in light of a perceived superior proposal, only the purchaser could elect to then terminate the merger agreement and require the target to pay the termination fee. Otherwise, the target remained obligated to seek shareholder approval and likely most of the directors would remain obligated, if subject to voting support agreements, to continue to vote for the transaction. In four transactions, even the target shareholders’ rejection of the merger agreement didn’t immediately give the target the right to terminate the merger agreement; the parties remained obligated to make good faith reasonable best efforts to first negotiate a restructuring that would result in shareholder approval.

Increasingly Common New Provisions
We increasingly saw provisions addressing cooperation on data processing conversions and coordination of dividend timing, with a desire to ensure that each parties’ shareholders received one dividend payment each quarter.

The Equipment Leasing M&A Outlook for 2023

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Fear, uncertainty and doubt are never harbingers of a good M&A environment. However, in my opinion, that is not the case as it relates to the equipment leasing and finance market.

In my 30-plus years of experience in the equipment finance sector, it’s always a good time for a bank buyer to purchase a solid equipment leasing and finance company as a way to enter the space. Generally, community banks’ commercial and industrial assets tend to be concentrated in real estate. Many community banks are also sitting on a lot of cash they are having trouble deploying into loans, especially non-commercial real estate C&I. By comparison, equipment finance companies are fantastic generators of C&I assets.

We’ve been involved in some recent transactions and projects during these less-than-ideal economic times. In early 2021, Marietta, Ohio-based Peoples Bancorp acquired North Star Leasing out of Vermont. In mid-2021, Indiana, Pennsylvania-based First Commonwealth Financial Corp. did a lift out of a team to start their foray into equipment finance. In mid-2022, Trustmark Corp. out of Jackson, Mississippi, launched a bank leasing business by hiring a well-known bank-owned equipment finance leader. Lastly, in the third quarter of 2022, New Orleans-based Gulf Coast Bank and Trust Co. acquired KLC Financial out of Minnetonka, Minnesota.

Each of these banks has a relatively small geographical footprint and acquired national leasing companies or platforms nowhere near their core markets. All were sitting on a great deal of cash and found equipment finance as one solution to effectively deploy those funds.

What does this mean for the future M&A market of equipment finance companies? The obvious headwinds for the space will be the continuation of the Federal Reserve’s tightened monetary policy, abnormal supply chain issues, elevated asset values and increasing interest rates to fight inflation. Fed governors are on record saying that the risk of recession is worth the price for reining in inflation.

Since equipment finance transactions have a short amortization period and each new transaction is reviewed based upon its own merits at the time of application, equipment leasing and finance companies adjust to conditions reasonably fast. Granted, some bank-owned competitors sometimes hold off raising rates longer than necessary; for them, it is a balancing act between needing C&I assets, their intrinsic cost of funds and their cash levels. Another thing that occurs during any period of uncertainty is that banks tend to pull in the reins on credit quality and lending in general, especially to small businesses.

The equipment leasing and finance business has all the attributes that make it appealing to potential bank buyers: The equipment finance industry does well in good times and very well in counter-cyclical times.

And generally speaking, it is always a good time for a bank to purchase a solid equipment finance company. There are roughly less than 700 independent leasing companies; there are roughly 4,800 banks in the U.S. of all sizes.

One of the key attributes of a “solid” leasing company is that it has a platform that is scalable. After all, the only reason for a bank to buy a leasing company is to scale it so it can put more of its assets to work generating larger spreads and stronger returns in this asset class, lifting the bank’s total spreads and return on assets. In every case, independent lessors are constrained by capital and the cost of capital that it can obtain. It is the exception for a bank acquisition of an equipment leasing company not to pan out as planned. Generally speaking, the actual results turn out well beyond what buyers expected going into the acquisition.

There are not many potential equipment leasing targets that are bank-ready at any moment in time; the same goes for banks that are prepared to purchase and succeed in a deal for an equipment leasing and finance company. We refer to those institutions that are ready as “equipment finance industry ready:” the prospective bank acquirer has done enough research and modeling of the equipment finance industry to understand what kind, size and equipment-type focus of equipment finance company would work best for them. That is, in fact, why banks engage advisors who have deep expertise in the whole equipment leasing and finance industry.

Issues in Selling to a Non-Traditional Buyer

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We have seen a surge in the number of sales of smaller banks to non-traditional buyers, primarily financial technology companies and investor groups without an existing bank.

This has been driven by outside increased interest in obtaining a bank charter, the lack of natural bank buyers for smaller charters and, of course, money. Non-traditional buyers are typically willing to pay a substantially higher premium than banks and including them in an auction process may also generate pricing competition, resulting in a higher price for the seller even if it decides to sell to another bank. Additionally, buyers and sellers can structure these transactions as a purchase of equity, as opposed to the clunky and complicated purchase and assumption structure used by credit unions.

But there are also many challenges to completing a deal with a non-traditional buyer, including a longer regulatory approval process and less deal certainty. Before going down the road of entertaining a sale to a buyer like this, there are a few proactive steps you can take to increase your chances for success.

The Regulatory Approval Process
It is important to work with your legal counsel at the outset to understand the regulatory approval process and timing. They will have insights on which regulators are the toughest and how long the approval process may take.

If the potential buyer is a fintech company, it will need to file an application with the Federal Reserve to become a bank holding company. In our recent experience, applications filed with the Federal Reserve have taken longer, in part because of the increased oversight of the Board in Washington, but also because the Federal Reserve conducts a pre-transaction on-site examination of the fintech company to determine whether it has the policies and procedures in place to be a bank holding company. Spoiler alert: most of them don’t.

If the potential buyer is an individual, the individual will need to file a change in control application with the primary federal regulator for the bank. The statutory factors that regulators need to consider for this type of application are generally less rigorous than those for a bank holding company application. We have seen the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. show more openness to next-generation business plans, as they understand the need for banks to innovate.

Conduct “Reverse” Due Diligence
Find out more about the buyer. You would be surprised at what a simple internet search will uncover and you can bet that the regulators will do this when they receive an application. We have encouraged sellers take a step further and conduct background checks on individual buyers.

Ask the buyer what steps have been taken to prepare for the transaction. Has the investor had any preliminary meetings with the regulators? What advisors has the buyer hired, and do they have a strong track record in bank M&A? Does the buyer have adequate financial resources?

Understand the key aspects of the buyer’s proposed business plan. Is it approvable? Are the new products and services to be offered permissible banking services? A business plan that adds banking as a service is more likely to be approved than one that adds international payments or digital assets. Does the buyer have a strong management team with community bank experience? What impact will the business plan have on the community? Regulators will not approve an application if they think the charter is being stripped and a community is at risk of being abandoned. We have seen buyers offer donations to local charities and engage in community outreach to show the regulators their good intentions.

Negotiate Deal Protections in the Agreement
Additional provisions can be included in the definitive agreement to protect the selling bank. For example, request a deposit of earnest money upon signing that is forfeitable if the buyer does not obtain regulatory approval. Choose an appropriate drop-dead date for the transaction. Although this date should be realistic, it should also incentivize the buyer to move quickly. We have seen sellers offer buyers options to pay for extensions. The contract should also require the buyer to file the regulatory application promptly following signing and to keep the selling bank well informed about the regulatory approval process.

While a transaction with a non-traditional buyer may be more challenging, under the right circumstances it can present an appealing alternative for a bank looking to maximize its sale price in a cash transaction.

2023 Bank M&A Survey: Complete Results

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Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, chief executives, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly M&A. The survey was conducted in September 2022, and primarily represents banks under $10 billion in assets. Members of the Bank Services program have exclusive access to the full results of the survey, including breakouts by asset category.

Despite a significant decline in announced deals in 2022, the survey finds that acquisitions are still part of the long-term strategy for most institutions. Of these prospective buyers, 39% believe their bank is likely to acquire another financial institution by the end of 2023, down from 48% in last year’s survey who believed they could make a deal by the end of 2022.

Less than half of respondents say their board and management team would be open to selling the bank over the next five years. Many point to being closely held, or think that their shareholders and communities would be better served if the bank continues as an independent entity. “We obviously would exercise our fiduciary responsibilities to our shareholders, but we feel strongly about remaining a locally owned and managed community bank,” writes the CEO of a small private bank below $500 million in assets.

And there’s a significant mismatch on price that prohibits deals from getting done. Forty-three
percent of prospective buyers indicate they’d pay 1.5 times tangible book value for a target meeting their acquisition strategy; 22% would pay more. Of respondents indicating they’d be open to selling their institution, 70% would seek a price above that number.

Losses in bank security portfolios during the second and third quarters have affected that divide, as sellers don’t want to take a lower price for a temporary loss. But the fact remains that buyers paid a median 1.55 times tangible book in 2022, based on S&P data through Oct. 12, and a median 1.53 times book in 2021.

Click here to view the complete results.

Key Findings

Focus On Deposits
Reflecting the rising rate environment, 58% of prospective acquirers point to an attractive deposit base as a top target attribute, up significantly from 36% last year. Acquirers also value a complementary culture (57%), locations in growing markets (51%), efficiency gains (51%), talented lenders and lending teams (46%), and demonstrated loan growth (44%). Suitable targets appear tough to find for prospective acquirers: Just one-third indicate that there are a sufficient number of targets to drive their growth strategy.

Why Sell?
Of respondents open to selling their institution, 42% point to an inability to provide a competitive return to shareholders as a factor that could drive a sale in the next five years. Thirty-eight percent cite CEO and senior management succession.

Retaining Talent
When asked about integrating an acquisition, respondents point to concerns about people. Eighty-one percent worry about effectively integrating two cultures, and 68% express concerns about retaining key staff. Technology integration is also a key concern for prospective buyers. Worries about talent become even more apparent when respondents are asked about acquiring staff as a result of in-market consolidation: 47% say their bank actively recruits talent from merged organizations, and another 39% are open to acquiring dissatisfied employees in the wake of a deal.

Economic Anxiety
Two-thirds believe the U.S. is in a recession, but just 30% believe their local markets are experiencing a downturn. Looking ahead to 2023, bankers overall have a pessimistic outlook for the country’s prospects, with 59% expecting a recessionary environment.

Technology Deals
Interest in investing in or acquiring fintechs remains low compared to past surveys. Just 15% say their bank indirectly invested in these companies through one or more venture capital funds in 2021-22. Fewer (1%) acquired a technology company during that time, while 16% believe they could acquire a technology firm by the end of 2023. Eighty-one percent of those banks investing in tech say they want to gain a better understanding of the space; less than half point to financial returns, specific technology improvements or the addition of new revenue streams. Just one-third of these investors believe their investment has achieved its overall goals; 47% are unsure.

Capital to Fuel Growth
Most prospective buyers (85%) feel confident that their bank has adequate access to capital to drive its growth. However, one-third of potential public acquirers believe the valuation of their stock would not be attractive enough to acquire another institution.

2023 Bank M&A Survey Results: Can Buyers and Sellers Come to Terms?

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Year after year, Bank Director’s annual M&A surveys find a wide disparity between the executives and board members who want to acquire a bank and those willing to sell one. That divide appears to have widened in 2022, with the number of announced deals dropping to 130 as of Oct. 12, according to S&P Global Market Intelligence. That contrasts sharply with 206 transactions announced in 2021 and an average of roughly 258 annually in the five years before the onset of the pandemic in 2020.

Prospective buyers, it seems, are having a tough time making the M&A math work these days. And prospective sellers express a preference for continued independence if they can’t garner the price they feel their owners deserve in a deal.

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, finds that acquisitions are still part of the long-term strategy for most institutions, with responding directors and senior executives continuing to point to scale and geographic expansion as the primary drivers for M&A. Of these prospective buyers, 39% believe their bank is likely to acquire another financial institution by the end of 2023, down from 48% in last year’s survey who believed they could make a deal by the end of 2022.

“Our stock valuation makes us a very competitive buyer; however, you can only buy what is for sale,” writes the independent chair of a publicly-traded, Northeastern bank. “With the current regulatory environment and risks related to rising interest rates and recession, we believe more banks without scale will decide to sell but the old adage still applies: ‘banks are sold, not bought.’”

Less than half of respondents to the survey, which was conducted in September, say their board and management team would be open to selling the bank over the next five years. Many point to being closely held, or think that their shareholders and communities would be better served if the bank continues as an independent entity. “We obviously would exercise our fiduciary responsibilities to our shareholders, but we feel strongly about remaining a locally owned and managed community bank,” writes the CEO of a small private bank below $500 million in assets.

And there’s a significant mismatch on price that prohibits deals from getting done. Forty-three percent of prospective buyers indicate they’d pay 1.5 times tangible book value for a target meeting their acquisition strategy; 22% would pay more. Of respondents indicating they’d be open to selling their institution, 70% would seek a price above that number.

Losses in bank security portfolios during the second and third quarters have affected that divide, as sellers don’t want to take a lower price for a temporary loss. But the fact remains that buyers paid a median 1.55 times tangible book in 2022, based on S&P data through Oct. 12, and a median 1.53 times book in 2021.

Key Findings

Focus On Deposits
Reflecting the rising rate environment, 58% of prospective acquirers point to an attractive deposit base as a top target attribute, up significantly from 36% last year. Acquirers also value a complementary culture (57%), locations in growing markets (51%), efficiency gains (51%), talented lenders and lending teams (46%), and demonstrated loan growth (44%). Suitable targets appear tough to find for prospective acquirers: Just one-third indicate that there are a sufficient number of targets to drive their growth strategy.

Why Sell?
Of respondents open to selling their institution, 42% point to an inability to provide a competitive return to shareholders as a factor that could drive a sale in the next five years. Thirty-eight percent cite CEO and senior management succession.

Retaining Talent
When asked about integrating an acquisition, respondents point to concerns about people. Eighty-one percent worry about effectively integrating two cultures, and 68% express concerns about retaining key staff. Technology integration is also a key concern for prospective buyers. Worries about talent become even more apparent when respondents are asked about acquiring staff as a result of in-market consolidation: 47% say their bank actively recruits talent from merged organizations, and another 39% are open to acquiring dissatisfied employees in the wake of a deal.

Economic Anxiety
Two-thirds believe the U.S. is in a recession, but just 30% believe their local markets are experiencing a downturn. Looking ahead to 2023, bankers overall have a pessimistic outlook for the country’s prospects, with 59% expecting a recessionary environment.

Technology Deals
Interest in investing in or acquiring fintechs remains low compared to past surveys. Just 15% say their bank indirectly invested in these companies through one or more venture capital funds in 2021-22. Fewer (1%) acquired a technology company during that time, while 16% believe they could acquire a technology firm by the end of 2023. Eighty-one percent of those banks investing in tech say they want to gain a better understanding of the space; less than half point to financial returns, specific technology improvements or the addition of new revenue streams. Just one-third of these investors believe their investment has achieved its overall goals; 47% are unsure.

Capital To Fuel Growth
Most prospective buyers (85%) feel confident that their bank has adequate access to capital to drive its growth. However, one-third of potential public acquirers believe the valuation of their stock would not be attractive enough to acquire another institution.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact [email protected].

Overcoming Regulatory Barriers to M&A in 2023

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The M&A slowdown in 2022 will shape expectations for 2023, and Adam Maier, a partner at Stinson LLP, believes deals could bounce back by mid-year. Heightened regulatory scrutiny could continue to have a chilling effect on larger bank M&A, he says, but community bank deals have been approved rather quickly. Prospective buyers would be wise to focus on due diligence and communicate with regulators to ease the approval process.

Topics include:

  • Predictions for 2023
  • Considerations for Prospective Buyers and Sellers
  • Working With Regulators
  • Branch Transactions

Trends to Watch: Fintech M&A

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Can we expect a lot of M&A activity in the fintech space in 2022?
The tailwinds are there for a big year, according to Geddes Johnson, managing director at Goldman Sachs Group. In this video, he explains the signals he’s seeing, along with his projections for special purpose acquisition companies, or SPACs. Johnson also predicts if this will be a strong year for strategic buyers, and whether banks will be active fintech acquirers.

Pandemic Offers Strong Banks a Shot at Transformative Deals

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It’s a rule of banking that an economic crisis always creates winners and losers. The losers are the banks that run out of capital or liquidity (or both), and either fail or are forced to sell at fire-sale prices. The winners are the strong banks that scoop them up at a discount.

And in the recent history of such deals, many of them have been transformative.

The bank M&A market through the first six months of 2020 has been moribund – just 50 deals compared to 259 last year and 254 in 2018, according to S&P Global Market Intelligence. But some banks inevitably get into trouble during a recession, and you had better believe that well-capitalized banks will be waiting to pounce when they do.

One of them could be PNC Financial Services Group. In an interview for my story in the third quarter issue of Bank Director magazine – “Surviving the Pandemic” – Chairman and CEO William Demchak said the $459 billion bank would be on the lookout for opportunistic deals during the downturn. In May, PNC sold its 22% stake in the investment management firm BlackRock for $14.4 billion. Some of that money will be used to armor the bank’s balance sheet against possible losses in the event of a deep recession, but could also fund an acquisition.

PNC has done this before. In 2008, the bank acquired National City Corp., which had suffered big losses on subprime mortgages. And three years later, PNC acquired the U.S. retail business of Royal Bank of Canada, which was slow to recover from the collapse of the subprime mortgage market.

Together, these deals were transformational: National City gave PNC more scale, while Royal Bank’s U.S. operation extended the Pittsburgh-based bank’s franchise into the southeast.

“We’re more than prepared to do it,” Demchak told me in an interview in late May. “And when you have a safety buffer of capital in your pocket, you can do so with a little more resolve than you otherwise might. The National City acquisition was not for the faint of heart in terms of where we were [in 2008] on a capital basis.”

One of the most profound examples of winners profiting at the expense of the losers occurred in Texas during the late 1980s. From 1980 through 1989, 425 Texas banks failed — including the state’s seven largest banks.

The root cause of the Texas banking crisis was the collapse of the global oil market, and later, the state’s commercial real estate market.

The first big Texas bank to go was actually Houston-based Texas Commerce, which was acquired in 1986 by Chemical Bank in New York. Texas Commerce had to seek out a merger partner after absorbing heavy loan losses from oil and commercial real estate. Through a series of acquisitions, Chemical would later become part of JPMorgan Chase & Co.

Two years later, Charlotte, North Carolina-based NCNB Corp. acquired Dallas-based First Republicbank Corp. after it failed. At the time, NCNB was an aggressive regional bank that had expanded throughout the southeast, but the Texas acquisition gave it national prominence. In 1991, CEO Hugh McColl changed NCNB’s name to NationsBank; in 1998, he acquired Bank of America Corp. and adopted that name.

And in 1989, a third failed Texas bank: Dallas-based MCorp was acquired by Bank One in Columbus, Ohio. Bank One was another regional acquirer that rose to national prominence after it broke into the Texas market. Banc One would also become part of JPMorgan through a merger in 2004.

You can bet your ten-gallon hat these Texas deals were transformative. Today, JPMorgan Chase and Bank of America, respectively, are the state’s two largest banks and control over 36% of its consumer deposit market, according to the Federal Deposit Insurance Corp. Given the size of the state’s economy, Texas is an important component in their nationwide franchises. 

Indeed, the history of banking in the United States is littered with examples of where strong banks were able to grow by acquiring weak or failed banks during an economic downturn. This phenomenon of Darwinian banking occurred again during the subprime lending crisis when JPMorgan Chase acquired Washington Mutual, Wells Fargo & Co. bought out Wachovia Corp. and Bank of America took over Merrill Lynch.

Each deal was transformative for the acquirer. Buying Washington Mutual extended JPMorgan Chase’s footprint to the West Coast. The Wachovia deal extended Wells Fargo’s footprint to the East Coast. And the Merrill Lynch acquisition gave Bank of America the country’s premier retail broker.

If the current recession becomes severe, there’s a good chance we’ll see more transformative deals where the winners profit at the expense of the losers.