M&A and banks: What’s new?
The number of whole, non-Federal Deposit Insurance Corp. (FDIC)-assisted bank transactions has increased every year over the past four years, more than doubling from 93 in 2011 to 226 in 2014. With 73 transactions through April of this year, 2015 is on pace to be slightly below the level reached in 2014. What are the trends observed so far in 2015?
- The Midwest continues to be the most active mergers and acquisitions (M&A) market, with 27 deals so far in 2015.
- Transactions involving banks with total assets between $100 and $250 million remain the most common, with 21 deals through April 2015.
- Price-to-tangible common equity multiples continue to increase, with an average multiple for 2015 transactions of 1.54x compared to 1.45x in 2014 and 1.17x in 2013.
What’s driving M&A activity?
Buyers are seeking growth. With loan demand weak and interest rates low, banks continue to struggle to achieve organic growth, which is spurring M&A activity. Banks with strong balance sheets continue to look for attractive targets, both within and contiguous to their markets. In general, size drives performance. SNL Financial data for 2014 shows a direct correlation between size and return on average assets (ROAA). Institutions with total assets less than $250 million reported an average ROAA of 0.58 percent. This percentage increases steadily across all size categories, with institutions larger than $5 billion reporting an average ROAA of 1.04 percent.
Sellers are motivated by a variety of factors. For many, the ever-escalating effort and expense of meeting increased regulations is pushing them towards selling. For others, the expense of adapting to shifting branch strategies and the need to develop competitive mobile banking offerings are pushing them to sell. Additionally, banks with aging ownership and poor succession options are capitalizing on the M&A market as an exit strategy. There is also a segment of banks that have not fully recovered from the financial downturn. These banks are often forced into acquisition discussions as deferral periods on trust preferred securities expire and interest rates on government borrowings (SBLF and TARP) increase. As shown in the chart below, the average multiple for struggling banks, as measured by nonperforming assets (NPA) to total assets, is lower than healthy banks.
The public markets are rewarding banks for deals that are quickly accretive to earnings per share, have minimal tangible book value dilution or that have a short tangible book value earnback. The recent increase in pricing multiples has also made cash transaction less feasible. Banks with strong currency in their own stock will likely be able to pay higher multiples and will have a distinct advantage over cash-only buyers. Banks are also more actively considering mergers of equals.
The most common complaint in bank M&A transactions has been the length of the regulatory approval process. Industry insiders say that having upfront communications with your primary regulator about a transaction can help the process go smoothly. In addition, bank acquisitions frequently face litigation, which adds costs and slows down the closing and approval process.
For community banks, long-term consolidation has resulted in substantially fewer, but much larger banks. According to the FDIC, between 1985 and 2013, the median community bank had grown to $167 million, while the number of institutions with assets less than $100 million had declined by 85 percent. De novo activity has been stagnant in the past couple of years, as well. Pennsylvania-based Bank of Bird-in-Hand, which opened November 29, 2013, has been the only new bank established in the United States since 2010. While the pace of M&A activity is unclear, it appears that the long-term trend of industry consolidation will continue.