Outlook Strong for Midwestern Bank Mergers & Acquisitions in 2015
In banking, bigger is better… up to $10 billion that is.
That was the main theme at the 2015 Bank Director “Acquire or Be Acquired” Conference in Scottsdale, Ariz., which brought together hundreds of bankers and deal makers for three days.
With its large number of relatively small community banks, the Midwest continued as the leader in the trend toward consolidation. In 2014, there were 281 bank M&A transactions reported, of which 112 were in the Midwest region, with aggregate transaction values of $2.44 billion.
The common denominator: higher prices attracted more sellers to the table. This was borne out locally in 2014, as we saw Nebraska, Colorado and Iowa banks trade hands at the highest multiples since the financial crisis. Banks in competitive auctions saw prices rise above two times tangible book value in a number of cases, and the “new normal” for clean banks in the region appears to have leveled out a multiple of about 1.5 times 8 percent tangible common equity.
The consolidation trend and higher prices are driven by simple economies of scale, with larger institutions capable of absorbing higher regulatory compliance costs across a larger asset base.
The trend is a product of the headwinds for community banks that have been widely reported in recent years. Low interest rates have compressed net interest margins to an industry-wide median of less than 3.2 percent, down from the pre-crisis median of about 4 percent. Similarly, the post-crisis median ROAA has shrunk from 1.04 percent to 0.77 percent, and the median ROAE has shrunk from a median 9.92 percent to 7.19 percent.
Given tighter margins and returns, many bankers appear to have concluded that acquisitions provide the best means for realizing the growth necessary to improve efficiency ratios and boost profitability.
According to recent data compiled by SNL financial, this maxim holds true in every asset size category except for banks in excess of $10 billion. For those that grow beyond the $10 billion threshold, a number of additional compliance obligations kick in, including direct examinations by the Bureau of Consumer Financial Protection, lower interchange revenues and other obligations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In light of the excess capital on many bankers’ balance sheets, we expect deals to continue to be announced at a rapid pace. Our firm already has seen three bank deals close in 2015, with two more recently announced.
Three members of Baird Holm’s bank M&A team – John Zeilinger, Amber Preston and Jonathan Wegner – presented a bank M&A simulation at the 2015 Acquire or Be Acquired Conference, with investment bankers from Sterne & Agee, the East Coast firm. If you would be interested in participating in a local version of the simulation, please contact Jonathan Wegner for more details at firstname.lastname@example.org.