Bank M&A: Pricing Considerations for 2018



Forty-four percent of the bank executives and directors responding to Bank Director’s 2018 Bank M&A Survey indicate that rising bank valuations made it more difficult to compete for acquisition targets, and higher prices didn’t result in a significant increase in deal activity in 2017. Rick Childs, a partner at survey sponsor Crowe Horwath LLP, explains how today’s environment fuels his expectations for the year, and why he thinks regulatory relief could result in fewer transactions.

  • Bank Valuations and Pricing
  • Impact of Regulatory Relief on M&A

In accordance with applicable professional standards, some firm services may not be available to attest clients. © 2018 Crowe Horwath LLP, an independent member of Crowe Horwath International. crowehorwath.com/disclosure

Navigating Today’s M&A Market



Bank deal activity in 2017 is likely to be on par with 2016, as the bank executives and board members responding to Bank Director’s 2017 Bank M&A Survey reflect lower levels of optimism for the bank M&A environment. In this video, Rick Childs, a partner at survey sponsor Crowe Horwath LLP, provides his perspective on the survey results and explains why, despite a lower number of sellers, it really is a buyer’s market today.

  • Expected Deal Activity for 2017
  • What Successful Buyers Look For in a Target
  • Factors That Sink a Deal

In accordance with applicable professional standards, some firm services may not be available to attest clients. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2016 Crowe Horwath LLP, an independent member of Crowe Horwath International. crowehorwath.com/disclosure

New Factors Impacting Bank M&A


As the industry heads into 2017, new factors including commercial real estate concentrations and a potential rise in interest rates could affect the pace of mergers and acquisitions. In this video, Jim McAlpin and Jonathan Hightower, both partners at Bryan Cave LLP, detail the drivers of M&A.

  • What is driving M&A in today’s environment?
  • What could shift M&A expectations in 2017?
  • What was the best deal announced in 2016?
  • What makes a successful deal?

Bank M&A Update: Oil Prices and Low Interest Rates May Be Hurting Deals


The state of the bank merger and acquisition (M&A) market thus far in 2016 has been tepid compared to prior years. 2015 began the same way, but was helped by a tremendous fourth quarter in which the number of deals announced was more than 25 percent higher than the average of the first three quarters of the year. At the end of 2015, many bankers and industry experts hoped that the euphoria from the fourth quarter would carry over into 2016. Instead, the first quarter of 2016 saw M&A deals retreat to the moderate levels experienced in the first three quarters of 2015, with a modest increase in the second quarter giving way to a much lower third quarter. Year-to-date, announced deals are down a modest 5.6 percent compared to the same time period last year.

M&A Activity by Region

Quarter Mid Atlantic Midwest Northeast Southeast Southwest West Other* Total Deals
2015-Q1 7 26 2 12 10 8   65
2015-Q2 5 27 5 14 11 7   69
2015-Q3 9 24 3 9 12 6 1 64
2015-Q4 13 30 3 24 6 7   83
2016-Q1 4 38 1 10 5 5 1 63
2016-Q2 6 29 2 14 7 8   66
2016-Q3 4 25 1 14 6 7   57

*No geography listed
Source: SNL Financial, an offering of S&P Global Market Intelligence

The Midwest has been bolstering the modest numbers experienced year-to-date. This impact on the overall percent change in M&A activity for 2015 and the first three quarters of 2016 is apparent when compared to the other regions.

Indicators Affecting Bank M&A
Oil prices have had an impact on the number of deals in the Southwest. Credit quality does have an impact on deal volume, but between Jan. 1, 2015, and June 30, 2016, credit quality has been fairly good compared to the levels experienced in years 2008 to 2010.

The decline in longer-term interest rates could have an impact on buyers’ perceptions of banks’ future earnings prospects with already compressed net interest margins. The 10-year U.S. Treasury constant maturity rate has flattened in 2016, and this could be a contributing factor in the number of announced bank M&A deals.

As shown below, average deal pricing has declined, which also could be contributing to the decline in the number of M&A deals announced.

Pricing Over Time

Pricing ratios.PNG

Although not shown, a review of the trailing 12-month return on assets for the selling banks and also the level of tangible equity and tangible assets shows they are fairly consistent quarter to quarter, so these financial metrics are not responsible for the decline in either pricing ration.

An overrepresentation of the banks in the Midwest also has had an impact on why the median pricing ratios have declined. The sellers in this region tended to be smaller, and the size of the seller does affect the price realized:

Median Price/Tangible Book Value Jan. 1, 2015, through Sept. 30, 2016

Asset Size of Seller Mid Atlantic Midwest Northeast Southeast Southwest West Total
<$50 Million N/A 121.9% NA 96.9% 115.3% 50.1% 115.3%
$50M – $100M 129.1% 108.4% 146.7% 96.3% 132.7% 128.1% 114.4%
$100M – $500M 122.6% 126.2% 142.6% 136.2% 150.1% 133.5% 133.3%
$500M – $1B 161.5% 136.0% 125.7% 161.4% 165.8% 178.7% 157.7%
$1B – $5B 152.8% 179.3% 164.2% 194.9% 156.9% 222.1% 179.3%
$5B – $15B 219.4% 155.7% N/A 233.0% N/A N/A 219.4%
>$15B 159.8% 199.3% N/A 151.5% N/A 272.1% 171.4%

More than 80 percent of the transactions announced involve sellers with less than $500 million in assets, which explains the lower realized pricing ratios. The Midwest contains a significant number of bank charters with less than $500 million in assets and, as a result, if this region’s total deal volume is up and the rest of the regions are down or flat, the impact on the overall pricing still will trend down.

Looking Ahead
The big questions remaining are what will happen in the fourth quarter of 2016 and whether the industry’s experience this year will be a predictor for 2017.

None of the economic factors are expected to materially improve for the fourth quarter. The Federal Reserve is expected to increase interest rates modestly, but there are Fed governors who favor no interest rate increase this year. As a result, it appears unlikely that the compression of net interest margin will improve drastically over the next 15 months. What does seem likely to occur is consistent quarter-to-quarter deal totals, although a reduction in the number of deals in the Midwest region could lead to even lower M&A totals for 2017.

Beyond M&A: Staying Relevant Through Innovation & Transformation


Banks of all sizes are facing a fiercely competitive environment, reduced interest margins and regulation. While many in the industry are leveraging acquisitions to address these pressures, some are thinking outside the box. In his presentation at Bank Director’s 2016 Acquire or Be Acquired Conference, Andrew Wooten of PricewaterhouseCoopers LLP reveals how leading banks are adapting their business models, and the role technology plays in that transformation.

Highlights from this video:

  • Forces Shaping Banking
  • Fintech Landscape
  • Becoming Digital: Build, Buy Or Partner?

Building An M&A Blueprint



Scale is driving buyers and sellers today, with acquirers seeking growth and sellers seeing scale as an obstacle. Christopher Olsen of Olsen Palmer outlines how both buyers and sellers can plan for a successful deal, and explains how even banks focusing on organic growth strategies will be impacted by consolidation.

  • Scale and M&A
  • A Buyer’s Plan
  • A Seller’s Plan
  • Impact on Organic Growth Strategies

M&A: What Today’s Sellers Need To Know


Pricing is often a deal-breaker in bank M&A, and sellers are seeking the best price possible for their shareholders. Dory Wiley of Commerce Street Capital explains that while pricing likely won’t rise in 2016, some banks will be better positioned for the best price and, more importantly, the best deal.

  • Which Banks Will Get a Higher Price
  • Expected Pricing Trends in 2016
  • How to Get the Best Deal

Key Trends & Topics in 2016


Small and midsized banks should continue to outperform the market, but “challenger banks” are positioned to take on even more market share. Tom Michaud, president and CEO of Keefe, Bruyette & Woods, identifies these “challenger banks,” which include innovators such as Silicon Valley Bank and Opus Bank, growing due to a focus on technology and niche expertise, and strong performers such as Bank of the Ozarks and Pinnacle Financial Partners, more traditional models with strong cultures that attract talent. Speaking to the audience at Bank Director’s 2016 Acquire or Be Acquired Conference, Michaud outlines expectations for the industry in 2016, including exposure to commercial real estate, a receptive IPO market and whether we’ll see more partnerships between banks and fintech companies.

Highlights from this video:

  • Current State of the Banking Industry
  • 2016 Banking Outlook & Emerging Trends
  • The Rise of Challenger Banks
  • The IPO Market for U.S. Banks
  • Fintech Partnerships
  • Consolidation Trends

The Growing Imperative of Scale


bank-scale-2-1-16.pngWhy are there so many people attending Bank Director’s 2016 Acquire or Be Acquired Conference this year, which at over 900 people is the largest number of attendees in the 22 years that we have been holding this event? Clearly the participants are interested in learning about the mechanics of bank M&A and the trends that are driving the market. But something seems to be different. I sense that more boards and their management teams are seriously considering M&A as a growth plan than perhaps ever before.

The heightened level of interest could certainly be explained by the continued margin pressure that banks have been operating under for the last several years. The Federal Reserve increased interest rates in December by 25 basis points–the first rate hike since 2006. But Fed Chairman Janet Yellen has said that a tightening of monetary policy will occur gradually over a protracted period of time, so any significant rate relief for the industry will be a long time in coming.

Other factors that are frequently credited with driving M&A activity include the escalation in regulatory compliance costs – which have skyrocketed since the financial crisis – and management succession issues where older bank CEOs would like to retire but have no capable successor available. But these challenges have been present for years, and there’s no logical reason why they would be more pressing in 2016 than, say, 2013.

What I think is different is a growing consensus that size and scale are becoming material differentiators between those banks that can look forward to a profitable future as an independent entity and those that will struggle to survive in an industry that continues to consolidate at a very rapid rate.

In a presentation this morning, Tom Michaud, the president and CEO at Keefe, Bruyette & Woods, showed a table that neatly framed the challenge that small banks have today in terms of their financial performance. Michaud had broken the industry into seven asset categories from largest to smallest. Banks with $500 million in assets or less had the lowest ratio of pre-tax, pre-provision revenue as a percentage of risk weighted assets – at 1.41 percent – of any category. Not only that, but the profitability of the next four asset classes grew increasingly larger, culminating in banks $5 billion to $10 billion in size, which had a ratio of 2.27 percent. Profitably then declined for banks in the $10 billion to $50 billion and $50 billion plus categories. Banks in the $5 billion to $10 billion are often described as occupying a sweet spot where they are large enough to enjoy economies of scale but still small enough that they are not regulated directly by the Consumer Financial Protection Bureau or are subject to restrictions on their card interchange fees under the Durbin Amendment.

Size allows you to spread technology and compliance costs over a wider base, which can yield valuable efficiency gains. It makes it easier for banks to raise capital, which can be used to exploit growth opportunities in existing businesses or to invest in new business lines. And larger banks also have an easier time attracting talent, which is the raw material of any successful company.

There will always be exceptions to the rule, and some smaller banks will be able to outperform their peers thanks to the blessings of a strong market and highly capable management. But I believe that many banks under $1 billion is assets are beginning to see that only by growing larger will they be able to survive in an industry becoming increasingly more concentrated every year. And for banks in slow growth markets, that will require an acquisition.