Takeaways: 2014 Acquire or Be Acquired Conference
Baird Holm LLP partners Amber Preston, Jonathan Wegner and John Zeilinger recently presented at Bank Director’s “Acquire or Be Acquired” Conference in Scottsdale, Arizona. Here are some of the major takeaways and trends from the attendees and other presenters at the conference:
- Earnings Trends (Finally) Improve. Firms tracking bank earnings suggest that market trends favor increased profits in 2014. The fourth quarter of 2013 saw EPS rise 9% year-over-year. Forecasts of EPS increases of up to 12% are forecast for 2014.
- Reverse Provisions are Wrapping Up. Earnings in recent quarters have been boosted by reverse provisions, resulting in average ALLLs falling closer to historic norms (1.86% of total assets at the end of Q3 2013). While additional reversals may continue, this driver of earnings is nearing its end.
- Net Interest Margins (NIMs) are Still Tight. Historic net interest margins of about 400 basis points have been replaced by average NIMs of about 360 basis points. The outlook for the foreseeable future is unchanged, and interest rate risk is now front and center.
- Markets Favor Size. The recovery in bank stock valuations has been led by institutions with more than $1 billion in assets. Average price-to-tangible-book-value ratios for FIs with more than $1 billion in assets was 155% whereas banks with less than $1 billion in assets saw P/TBV ratios of 92% on average. While control premiums in deals help close the gap, the divergence remains significant.
- Mergers of Equals (MOE). Recent “mergers of equals” – transactions involving two financial institutions of comparable size – have seen a significant increase, due largely to market response from the announcement of these historically rare transactions. Whereas announcements of public bank deals traditionally have resulted in the acquirer’s stock suffering a downtick, recent MOEs have rewarded both acquirer and target shareholders with noteworthy post-announcement appreciation. The takeaway: the market is rewarding banks for achieving greater scale on the assumption that cost savings will make the combined banks more efficient and competitive.
Conditions continue to favor consolidation, and institutions seeking to sell are seeing stronger valuations. In 2013, average P/TBV improved to 125% for all banks across the United States. Our recent experience involving Midwest transactions confirms these trends, as significantly stronger pricing for sellers continues to emerge.