New Research Finds 4 Ways to Improve the Appraisal Experience

Accelerating appraisals has become increasingly important as lenders strive to improve efficiency in today’s high-volume environment.

Appraisals are essential for safe mortgage originations. Covid-19 underlined the potential impact of modernizing appraisal practices, and increased the adoption of digitally enabled appraisal techniques, appraisal and inspection waivers, and collateral analytics.

Banks have numerous opportunities to improve and modernize their appraisal process and provide a better consumer experience, according to recent research sponsored by ServiceLink and its EXOS Technologies division and independently produced by Javelin Strategy & Research. The research highlights several actions that lenders can take to improve their valuation processes, based on the feedback of 1,500 single-family homeowners in March who obtained either a purchase mortgage, refinance mortgage, home equity loan/line of credit for their single-family home, or who sold a single-family home, on or after January 2018.

1. Implement digital mortgage strategies that streamline appraisal workflows. One of the most-compelling opportunities to make appraisals more efficient is at the very onset of the process: scheduling the appointment. Scheduling can be complicated by the number of parties involved in an on-site inspection, including a lender, appraiser, AMC, borrower and real estate agent. Today, two-thirds of consumers schedule their appointments over the phone. This process is inefficient, especially for large lenders and their service providers, and lacks the consistency of digital alternatives.

Lenders that offer digital appraisal scheduling capabilities provide a more-predictable and consistent service experience, and reduce the back-and-forth required to coordinate schedules among appraisers, borrowers, real estate agents and home sellers. Given younger consumers’ tendency to eschew phone calls in favor of digital interactions, it’s essential that the industry embraces multiple channels to communicate, so borrowers can interact with lenders and AMCs on their own terms.

2. Increase transparency in the appraisal process. Even after an appointment is scheduled, consumers typically receive limited details about the appraiser, what to expect during the appointment and how the appraisal factors into the overall mortgage process. For example, 61% of consumers received the appraiser’s contact information before the appointment; while only 20% were provided with the appraiser’s photo and 9% were told what type of car they will drive. Providing borrowers with more information about the appraisal appointment bolsters their confidence; information gaps can contribute to a less-satisfying experience. Nearly 20% of consumers said they were not confident or only somewhat confident about their appointment, while over 30% said the same about the names of the appraiser and AMC.

3. Focus on efficiency. Overall, 38% of consumers said the duration of the overall appraisal process contributed to a longer mortgage origination process; delays among purchase mortgage and home equity borrowers were even higher.

For example, about two-thirds of appraisal appointments required the consumer to wait for the appraiser to arrive within an hours­long window or even an entire day, as opposed to giving the consumer an exact time when the appointment will take place. Given this challenge, lenders and appraisal professionals that offer more-precise appointment scheduling can improve the consumer experiences and streamline the origination process.

4. Implement processes and technology that support innovative approaches to property inspections and valuations. Covid-19 highlighted the opportunity banks have to adopt valuation products that sit between fully automated valuations and traditional appraisals, such as valuation methods that combine third-party market data and consumer-provided photos and video of subject properties. This approach still relies on a human appraiser to analyze market data and subject-property

This concept is gaining traction in the mortgage industry. In the future, it’s conceivable the approach could be expanded with the use of artificial intelligence and virtual reality technologies.

No matter the method an appraiser uses to determine a property’s value, the collateral valuations process is fundamentally an exercise in collecting and analyzing data. Partnering with an innovative AMC allows lenders to take advantage of new techniques for completing this critical market function. You can view the full white paper here.

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.

2017 Bank M&A Survey: What Buyers Value

merger-value-11-28-16.pngDriven by shareholder pressures in a low-growth and highly regulated environment, some community banks could be seeking an exit in the near future. But which banks are positioned to get the best price in today’s market? Fifty-eight percent of executives and board members whose bank has made a past acquisition report that being located in an attractive market is the most important factor in their decision to acquire another institution, according to Bank Director’s 2017 Bank M&A Survey, which is sponsored by Crowe Horwath LLP.

Forty-one percent say the opportunity to pick up lending teams or talented lenders as part of an acquisition is highly important, due to a competitive environment for commercial lenders. Bank Director surveyed online 206 chief executive officers, chief financial officers, chairmen and directors of U.S. banks in August and September.

  • An increasing number of respondents feel that the current environment for bank M&A is stagnant or less active: Forty-five percent indicate that the environment is more favorable for deals, down 17 points from last year’s survey.
  • Forty-six percent indicate that their institution is likely or very likely to purchase another bank by the end of 2017.
  • Twenty-five percent report that they’re open to selling the bank, considering a sale or actively seeking an acquirer. Of these potential sellers, 54 percent cite regulatory costs as the reason they would sell the bank, followed by shareholder demand for liquidity (48 percent) and limited growth opportunities (39 percent).
  • Price, at 38 percent, followed by cultural compatibility, at 26 percent, remain the two greatest challenges faced by boards as they consider potential acquisitions. Price is identified as the top reason that potential buyers and sellers have walked away from a deal in the past three years.
  • Forty-five percent report that they are seeing a deterioration in loan underwriting standards within the industry, leading to possible credit quality issues in the future.
  • Concerns about the quality of loan underwriting standards at the target institution caused 28 percent to walk away from a potential acquisition.
  • Eighty-eight percent believe that interest rates will rise by the end of 2017. Forty-six percent expect a modest increase of less than half a percent.

Just one-quarter of respondents indicate that they’re likely or very likely to purchase a branch or multiple branches by the end of 2017. Given the rise of mobile and online banking, foot traffic in branches is declining. Banks are evaluating the value of branches to their overall strategy, causing many—particularly the largest institutions—to attempt to rationalize their branch networks by selling or shuttering those deemed less desirable. When asked about how attractive the purchase of a branch is compared to five years ago, attitudes are mixed: One-third believe that buying a branch is more attractive, while another third believe that the value has remained the same. Twenty-eight percent believe that branch acquisitions are less valuable than they used to be, a view supported by national trends: S&P Global Market Intelligence reported in September that the industry shed more than 7,000 branches over the past five years.

To view the full results of the survey, click here.

2015 Compensation Survey: What Executives and Board Members Want

5-20-15-Compensation.pngFor a moment, forget about the talk about the death of traditional banking: Executives with particular sets of skills are in demand at U.S. financial institutions. Sixty-one percent of the senior executives and directors responding to Bank Director’s 2015 Compensation Survey, sponsored by Compensation Advisors, report that their bank hired or promoted new executives last year. One-third lost executive personnel.

At the board level, 15 percent say they brought on new directors in 2014, with many seeking board members with particular expertise, or adding those that can help grow their institution.

Lenders continue to be in high demand, particularly at banks with less than $5 billion in assets. Technology/information security, risk management and compliance were other top areas for hires and departures in 2014. Banks aren’t training up the next generation of bankers like they used to, so given a limited (and aging) talent pool, offering the right compensation package is an important strategy for ensuring the bank’s long term sustainability.

The 2015 Compensation Survey tracks what bank chief executive officers and boards were paid in fiscal year 2014, what benefits are currently awarded to executives and directors, and how bank leaders want to be compensated by their organizations. Responses were collected online from 281 directors and senior executives of U.S. banks, including CEOs and human resources officers, beginning March 18 and ending April 7, 2015. Information on board and CEO pay was supplemented using data from 90 bank proxy statements, collected March 16 through March 20.

Key Findings:

  • Executives responding to the survey say that in addition to a cash salary and bonus, what they want most is a retirement benefit, at 72 percent. Just half desire equity as part of their own compensation. Even the executives of publicly traded banks place less emphasis in holding equity: Just 58 percent indicate it’s of high value.
  • Seventy percent report that their bank offers a non-qualified retirement benefit. Half offer it to the bank’s CEO, and 39 percent to the entire management team as well.
  • Less than half of all respondents, and two-thirds from publicly traded banks, allocate equity to executives annually. Thirty-one percent offer restricted stock, while 21 percent grant stock options. Just 5 percent give their executives synthetic equity.
  • The median salary for a bank CEO was $382,205 in FY 2014, but how much the CEO earns varies widely depending on the size of the bank.
  • Twenty-eight percent of respondents plan to increase director compensation in 2015, and more than half increased pay in 2013 or 2014. However, 28 percent report their board hasn’t seen a raise in pay since at least 2010.
  • While most bank boards are earning more, directors are also spending more time on bank board activities. The median hours per month devoted to meetings, business development, education and other board obligations rose to 20 hours, up 33 percent from 2014.
  • Boards continue to shift from board meeting fees to awarding an annual retainer. The percentage of directors receiving board meeting fees declined 7 points from the 2012 survey, to 77 percent. Directors receiving annual retainers grew 17 points, to 61 percent.
  • The median board meeting fee for an independent director was $1,000 in FY 2014, an increase of one-third from FY 2013. The median annual retainer remained level in 2014, at $20,000.

Download the summary results in PDF format.

Bank M&A in 2015: Looking Ahead

In this video, Rick Childs of Crowe Horwath LLP highlights findings from Bank Director’s 2015 Bank M&A survey, sponsored by Crowe Horwath, which reveals a notable gap between those banks looking to sell and banks looking to buy.

Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. 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. © 2015 Crowe Horwath LLP.

CEO Evaluations: Positioning the Bank for Success

11-19-14-Emily-DC.jpgA surprising number of boards don’t have a process in place to evaluate their most valuable player: the chief executive officer. But every bank should have a process in place, to provide the CEO not only with recognition for his accomplishments, but also to provide feedback, support and direction.

“I think a board that is undertaking a CEO evaluation should be applauded because I’m amazed how many boards do not,” says Jim McAlpin, a partner at Bryan Cave LLP. Gayle Appelbaum, a principal with compensation consulting firm McLagan, has talked to CEOs with long tenures at their institutions that have never had a performance evaluation.

Banks taking those first steps toward evaluating the CEO should view the process as an opportunity to discuss where the board wants to take the institution, what goals need to be met in order to get there and how the CEO will be compensated for achieving those goals, McAlpin adds.

While the board should have input, the responsibility for the evaluation process should ultimately fall on a designated independent board member—the chairman, or if the chairman is the CEO, then the lead director or the compensation committee chairman. How the board provides that input back to the CEO will differ based on the bank’s governance structure. If the evaluation falls under the realm of the compensation committee, for instance, the compensation committee chairman would ask these committee members to complete an evaluation form and return it to the chairman, who would then use those forms to complete the overall evaluation. The committee chair would then meet with the CEO to discuss the evaluation, perhaps with the board chairman or lead independent director present as well. And while some banks may consider the compensation committee, or even the full board, responsible for the evaluation, McAlpin recommends that one person communicate the message to the CEO.

“It’s a much smoother process if there’s one person that can be the focal point for the conversation with the CEO, as opposed to a committee talking to the CEO. Whatever message the board wants to convey needs to be clear [and] needs to be thought out in advance. In my mind, it’s much better if one person is conveying that message,” says McAlpin. “You want expectations to be very clearly set.”

Of course, the board will need to determine what it expects of its CEO in advance of conducting the evaluation. The board, through its designee, should communicate the areas in which the CEO is expected to improve, as well as the goals he or she is expected to accomplish in the upcoming year. As such, the evaluation should not be a static form. As the board’s goals for the CEO change, the board will want to modify the criteria that form the basis of its assessment. Appelbaum notes that the areas the board wants to focus on for the evaluation will differ based on each CEO and the bank’s needs, but would likely include:

  • How well the CEO leads the organization, including development of staff and planning for succession
  • Employee and customer satisfaction scores, if the bank has that information available
  • Relationship with the board, including how well the CEO communicates with board members and how open he or she is to feedback
  • Community involvement, including how the CEO is supporting and promoting the bank within the community
  • Fulfillment of key objectives within the strategic plan, including the bank’s financial performance.

Seventy-two percent of respondents to Bank Director’s 2014 Compensation Survey tie CEO compensation to performance indicators, with asset quality, return on equity and return on assets the most common metrics used. However, Appelbaum says that these quantifiable factors, which are tied to the CEO’s bonus, should be distinct from the more intangible elements discussed in the evaluation, which dig more deeply into board expectations of the CEO’s role within the organization.

It’s important to align the evaluation, and compensation, with the bank’s strategic plan. Directors from institutions of all sizes consistently indicate—most recently in the 2014 Compensation Survey—that tying the compensation of top executives to performance remains a top challenge. Yet less than half of the respondents to that survey—bank senior executives and board members of U.S. banks of all sizes—tie CEO pay to strategic goals. How will the CEO know how to effectively lead his institution without clear direction from the board?

An important final factor for boards to consider is ensuring the right amount of communication with the CEO, as well as providing the support that the CEO needs to achieve the strategic goals of the bank. “The board should ask the CEO what support he or she will need in achieving the goals [and] what additional resources might be needed,” says McAlpin. If the board is setting goals that the CEO believes are unachievable, or if the CEO feels that additional personnel or resources are needed, this can be discussed at this time. The CEO should feel supported, but the members of the board should also remember that they represent the shareholders, not to the CEO, he adds. “It’s incumbent upon the CEO and the board to have the bank achieve the best results possible and maximize shareholder value.”

Appelbaum recommends, at minimum, that the board conduct a midyear evaluation to provide the CEO feedback on progress. In turn, the board’s constructive comments could give the CEO the opportunity to course-correct in order to do what he or she has been tasked to do.

Additionally, the board chairman or lead director may consider meeting the CEO regularly, even monthly, to discuss what the CEO needs from the board in terms of support and what issues are top of mind. “You have to let the CEO run the bank, and you can’t allow the board to micromanage the bank or run the bank on a daily basis” says Appelbaum. “But you want the organization to win, and making sure your CEO has all the right information, all the skills [and] all the resources available to make that happen makes for a much better organization.”

An effective evaluation process positions the bank for success in the long run, not only due to the attention and care to its top executive’s performance, but also furthering communication and focus on what the bank needs to do to achieve its strategic vision. “A lot of bank boards are not used to that level of interaction with the CEO in setting goals and objectives,” says McAlpin.

2015 Bank M&A Survey: Plenty of Buyers – but Too Few Sellers?

11-14-14-MandA.jpgThere’s no shortage of financial institutions seeking an acquisition in 2015, but fewer banks plan to sell than last year, according to the bank CEOs, senior officers and board members who completed Bank Director’s 2015 Bank M&A Survey, sponsored by Crowe Horwath LLP. Forty-seven percent of survey respondents reveal that they plan to purchase a healthy bank within the next 12 months, compared to a mere 3 percent who plan to sell their bank.

Are some bank boards and management just waiting for the right deal? Seventy-one percent would consider selling the bank if they received an attractive offer. As bank valuations rise, potential sellers express a growing desire for stock in return for selling the bank—often combined with cash.

There may be fewer fish in the sea—at least not enough to satisfy the appetites of growth-hungry banks—but the survey reveals several positive trends for the industry. Of the two-thirds of respondents who see a more favorable M&A environment, 55 percent cite improved credit quality and 48 percent improved stock valuations. And despite the challenges of a highly competitive growth environment and costly regulations, 64 percent of respondents expect their bank to thrive as an independent entity. Absent a compelling deal, bank leaders express a preference for self-determination: When asked about barriers to selling the bank, more than two-thirds say that the board and/or management want the organization to remain independent.

More than 200 directors and senior executives of banks nationwide responded to the survey, which was conducted by email in September.

Key Findings:

  • Credit quality’s adverse impact on deal-making is lessened in the minds of respondents. A little more than one-third of respondents say that concerns about the asset quality of potential targets impedes the deal, a decline of 41 percent since the 2013 survey.
  • As credit quality continues to improve, 60 percent of bank leaders now reveal that post-merger integration was the most difficult aspect of their most recent deal—up by 33 percent from last year’s survey.
  • Price is still an issue. When asked about barriers to buying another bank, 63 percent say that the pricing expectations of potential targets are unrealistically high. Fifty-six percent say that current pricing is too low to sell the bank.
  • Both buyers, at 53 percent, and sellers, at 45 percent, prefer a mix of cash and stock as payment for the purchased bank. The percentage of potential sellers that would prefer that the transaction include stock has increased by 30 percent since the 2013 Bank M&A Survey, likely a reflection of higher valuations for bank stocks.
  • Eighty-three percent feel that their institution has adequate access to the capital needed to meet the demands of Basel III and fuel the bank’s growth and acquisition strategy.
  • Three-quarters of respondents integrated board members and/or executives from the acquired bank into the surviving institution after their most recent acquisition.

Download the summary results in PDF format.

2014 Growth Strategy Survey: Technology’s Role in a More Profitable Bank

8-22-14-Growth-Survey.pngIt’s not overstating the case to say that meeting strategic growth goals in today’s current climate is a huge challenge for the nation’s banks. In fact, 84 percent of the officers and board members who responded to Bank Director’s 2014 Growth Strategy Survey, sponsored by Vernon Hills, Illinois-based technology firm CDW, say that today’s highly competitive environment is their institutions’ greatest challenge when it comes to organic growth—a challenge further exacerbated by the increasing number of challengers from outside the industry primed to steal business from traditional banks.

Technology can be a valuable tool in differentiating the bank’s offerings to consumers, and as a part of the bank’s overall strategy, can help make the institution more profitable. Many of the directors and executives responding to the survey reveal that they want to know more about how technology can make the bank more efficient, and which technology trends can improve their customers’ experience. The technology is out there—but many industry leaders don’t know what technology to use, or how to deploy it. So bank boards give the topic a wide berth: Just 30 percent say that technology is on the agenda for every board meeting.

More than 100 directors and senior executives of banks nationwide responded to the survey, which was conducted by email in June and July.

Key Findings:

  • Respondents reveal a strong need to better understand how technology can make the bank more efficient and improve the customer experience – but just 30 percent say that their board discusses technology at every board meeting. The majority of respondents, 47 percent, address the issue quarterly.
  • Fifty-two percent of directors and officers want to better understand business intelligence and analytics. More than 40 percent of all respondents, 78 percent of those from banks with more than $5 billion in assets, currently use data to support the bank’s growth goals. An additional 15 percent plan to use analytics over the next 12 months.
  • More than half reveal concerns about how their bank will address the evolving state of mobile banking. Eighty-seven percent offer mobile banking and 12 percent plan to offer this service to customers.
  • Omnichannel banking, which integrates delivery channels such as mobile, online and branch, is a great source of uncertainty for senior management and directors. Almost half say that they want a better understanding of this approach to banking. More than one-third use or plan to use omnichannel banking to grow within the next year—but an almost equal number are unsure how or when omnichannel banking will be integrated within their organization.
  • Core processors can make or break the organization’s ability to innovate, especially at community banks that depend on vendors for their technological know-how. Half reveal that their core processor is slow to respond to innovations.
  • One-quarter of respondents say that their IT staff lacks the resources to support the bank’s growth plans and current operations, with many citing a need for additional or more highly trained staff.

Download the summary results in PDF format.

2014 Bank M&A Survey: Community Bank Trends

Last November, Bank Director published the 2014 Bank M&A Survey, which found that 76 percent of bank senior executives and directors expect to see more deals in the year ahead, and much of that activity will take place among community banks. With that in mind, Bank Director further explored these results among banks with less than $5 billion in assets to examine how community banks plan to approach acquisitions in 2014.

Over 230 officers and directors of banks across the U.S. responded to the survey, which was conducted by email in the fall of 2013. Of these, 202 represented banks with less than $5 billion in assets. The 2014 Bank M&A Survey was sponsored by Crowe Horwath LLP.

Planned M&A in 2014 by Asset Size


The Growing Serial Acquirers: Banks with Assets of $1 Billion to $5 Billion

Many banks with between $1 billion and $5 billion in assets are gaining reputations as serial acquirers. These banks have a little wiggle room before they hit the $10-billion asset threshold when they will be subject to new regulations, and many find that growing through acquisitions is a quicker route to expanding market share than organic growth. Rick Childs, a director at Crowe Horwath, says that the average size of the seller—at roughly $200 million in assets—fits right into the size of acquisition that these banks are willing to make. “They’re looking to build themselves a better footprint and franchise, and so they’re being active acquirers, and there’s really not a lot of competition [for deals from larger institutions] like there would have been maybe 10 years ago” says Childs. “It’s just fortunate that the size of the seller fits the size that they are probably the most comfortable in acquiring.”

As many of these banks are seasoned acquirers, it’s not surprising that 96 percent of board members have M&A experience, either within the banking industry or within their own business, compared to 81 percent in the industry overall. And M&A is a key part of the strategic direction of these institutions: More than half of respondents from banks between $1 billion and $5 billion in assets report that deal-making is a regular part of their board’s agenda, while banks with less than $1 billion in assets are more likely to only discuss deals as opportunities arise or as part of the institution’s annual strategic planning process.

Banks with assets between $1 billion and $5 billion did more transactions in 2013 than banks overall, according to the survey.

  • More than half report the purchase of a healthy bank in the previous 12 months, versus 24 percent overall.
  • One-quarter participated in a FDIC-assisted deal, while just 8 percent of total participants participated in a FDIC transaction last year.
  • Thirty-four percent of respondents report their bank purchased one or more branches last year, compared to 23 percent overall.
  • Twenty-seven percent purchased at least one non-depository line of business, like an investment management business or an insurance brokerage, compared to 11 percent of total participants.

Looking ahead to 2014, participants indicate that their institutions will likely keep up this pace, with almost 70 percent of banks of this size planning a healthy bank acquisition.

Still Independent: $500-Million to $1-Billion Asset Banks

Respondents from banks with between $500 million and $1 billion in assets reveal a commitment to independence. Forty-six percent of participants from these banks indicate plans to buy a bank in 2014, but few plan to sell.

Childs says banks need three qualities to become an acquirer:

  • Adequate capital and earnings for regulatory approval of the deal
  • Infrastructure in place to both acquire and grow the institution
  • Available sellers in the bank’s target market

Banks closing in on $1 billion in assets may have adequate capital and the appropriate infrastructure in place, but might have a hard time finding the right target geographically close enough to make sense. “If you’re in a state where there are very few sellers, and you look at your surrounding states and it’s not much better, you may never be able to execute a strategy for growth because you just don’t have a significant number of available sellers,” says Childs.

When asked about plans to sell a bank, branch, loan portfolio or non-depository line of business, 94 percent of respondents from banks between $500 million and $1 billion in assets reveal that they don’t plan to sell anything, compared to 80 percent overall. Just 3 percent plan to sell their bank, and 56 percent cite the fact that the management and board wish to remain independent as a barrier to a potential sale. Childs adds that many of these banks hold a strong position in their markets, supporting their choice to stay independent and build a strategy for growth. “There’s still the possibility for them to build a franchise and build a lot of value for their organization.”

Ripe for the Acquisition: Less Than $500-Million Asset Banks

Looking ahead to 2014, 10 percent of respondents from banks with less than $500 million in assets plan to sell their institution—double the 5 percent of respondents overall.

Why sell? Respondents from these banks are more likely to cite the high cost of regulation, at 39 percent compared to 25 percent of overall respondents.

While regulations currently place a strain on bank management and boards, Childs believes this burden will level off as the environment settles and technology allows smaller banks to be more effective and efficient. “While I agree that right now it feels really oppressive at times…I don’t think that would be a reason that I would want to sell. I’d want to sell for a variety of other reasons,” says Childs, citing as examples liquidity and diversification of investments, succession concerns and the need for scale to manage costs.

Limited growth opportunities are pushing small bank respondents to want to sell, at 32 percent of respondents from banks below $500 million in assets, compared to 23 percent overall. Twenty-nine percent of officers and directors of the smallest banks say that they’d sell because banking just isn’t enjoyable anymore, compared to 18 percent overall. 

“Management and directors are telling us that banking’s not fun anymore,” says Childs.

Pricing Barriers by Asset Size


Those willing to sell still face barriers. The smallest banks, at 56 percent, are more likely to think pricing remains too low than banks overall, at 42 percent. In contrast, 63 percent of all respondents say that potential targets have unrealistic expectations for a high price. Meanwhile, 40 percent of potential buyers overall cite concerns about the asset quality of potential targets as a barrier to making a deal, and 10 percent of respondents from banks with less than $500 million in assets say that their bank’s asset quality is subpar, compared to just 5 percent overall.

Childs says that while asset quality has improved, “it’s still historically too high, in terms of the level of non-performing assets to total assets.” The economic recovery remains sluggish in some parts of the country. All this ties to the price, and boards waiting for a significant increase in pricing may be disappointed. Some small institutions “may still be longing for the glory days of two-times book value, which I don’t think are going to come back. We may see some really positive pricing here in the next several years, but it’s never going to get back to the heyday that it was,” says Childs.

The Price Is Not Right

ma-research-13-report.pngAn increasing number of banks are interested in making an acquisition, but a significant misalignment between the price that buyers are willing to pay and that sellers are willing to accept will most likely be a barrier to any significant consolidation in 2013, according to a recent email survey of officers and directors conducted by Bank Director and Crowe Horwath LLP.

According to the survey, which was completed by 224 bankers in October, 57 percent of respondents hope to make some form of acquisition this year, which is up from 52 percent last year. Of those, 46 percent want to buy a healthy bank, 21 percent are interested in branches, and 17 percent seek to buy an FDIC assisted institution. Last year, there was less interest in healthy banks at 37 percent but more interest in branches and FDIC assisted transactions—at 27 percent and 24 percent, respectively. 

Respondents looking at acquisitions outside of their core branch banking franchise show particular interest in investment management and/or trust businesses at 40 percent and insurance brokerage and/or agency businesses at 30 percent. Twenty-nine percent of those looking at acquisitions outside of their core banking franchise seek to acquire a residential mortgage origination business.

Chad Kellar, senior manager at Crowe Horwath LLP, explains that acquisitions of mortgage origination businesses are of interest right now given the relatively strong position of mortgage companies that made it through the worst of the financial crisis.

“Sales are very strong right now, and obviously the refinancing boom is continuing,” says Kellar. “So those [mortgage companies] specializing in refinance, in particular, are going gangbusters this year and last year relative to what they had been doing even before the downturn.”

For potential buyers, the top three reasons for making an acquisition did not change this year, with 63 percent of respondents wanting to supplement organic growth, 60 percent looking to increase market share and 41 percent trying to rationalize the cost of regulation over a wider base.

Not surprisingly, pricing is the number-one barrier for both buyers and sellers. Sixty-two percent of buyers cite unrealistically high pricing expectations as a top barrier to an acquisition, and 71 percent of potential sellers feel the pricing is too low to make a deal.

The disagreements over pricing may come down to perceived asset quality—with 59 percent of buyers concerned about the asset quality of potential targets but only 5 percent of sellers reporting subpar asset quality as a barrier to selling their bank.

“From the perspective of an acquirer, there is still significant concern about what the seller is reporting as their asset quality,” says Kellar. “Through a number of transactions where we go in and say, “here’s the potential loss,” it’s still a multiple of what the seller’s board is thinking. So there is a pretty big divide between an acquirer that’s healthy enough to go do a transaction and the seller in a lot of these situations.”

Until these pricing issues are resolved, it appears that any great wave of M&A activity will have to be put on hold. Eighty-nine percent of respondents say they have no intention of selling a bank, branch, line of business, or loan portfolio in the next year. Only 2 percent of respondents report they are planning to sell a bank, which could be bad news for the 46 percent who say they want to buy one.

Rick Childs, director at Crowe, says these results are consistent with what he has been seeing in practice.

“While waves of consolidation have been predicted for a number of years, the survey really indicates that credit quality and pricing concerns have really held back the level of consolidation,” says Childs. “I think banks aren’t as interested in selling as the predictions would suggest. Certainly, increased regulation creates headwinds and the survey shows that banking is not as fun [as it used to be]. But I think these people are still committed to independence, not wanting to have the hometown bank owned by somebody else. There’s still a lot of pride in that.”

For the full summary report, click here.

**A full discussion of survey results will appear in the 1st Quarter 2013 Issue of Bank Director magazine.