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.