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The Rising Urge to Merge: Prices are firming, pace is picking up

By: Bill Poquette

If bank merger activity is any indication, the economy is indeed on the mend. A good sign? Mixed blessing?

First, the statistics. They don’t reflect a boom or even a boomlet. But the trend is up, slightly, kind of like the economy. SNL Financial counted 136 whole-bank deals in the first half of 2014, an 18 percent increase from the first half of 2013. The aggregate value increased by one-third, to $6 billion. These numbers bear out the results of a Bank Director magazine survey of bank executives and directors sponsored by Crowe Horwath LLP. A “slight increase” was seen by 46 percent of respondents, and an “increase” by another 30 percent.

Price/book and price/earnings ratios are also trending upward. Statistics cited by Bob Browne, president and CEO of Cedar Creek Consulting in Leawood, Kan., at the annual convention of the Community Bankers Association of Kansas last month averaged 142.12 percent of book value for the first half of 2014 vs. 121.02 percent for all of 2013, and 27.7 times earnings so far this year vs. 23 for 2013.

Among other things, improved asset quality and fewer bank failures are helping to fuel the merger activity. The number of problem institutions has dropped by more than 400 since 2010, according to Browne, and he expects a total of perhaps 25 failures for all of 2014. As of mid-July, the tally was 13.

Then there are the usual reasons for smaller banks to sell cited by various experts, including lack of succession planning and/or options, compliance costs, difficulties raising capital, populations leaving rural communities, and Gen X and millenials seeing less need for bank relationships than preceding generations.

On the other hand, potential buyers are sensing opportunities in the current environment. In comments prepared as part of Browne’s session at the CBA convention, Dean Johnson of The Capital Corp. in Overland Park, Kan., observed:

“Strategic buyers are focused on finding a viable market and the right bank with key personnel in that market. These buyers are willing to pay up for these franchises and will not even look at banks that don’t fit this criteria.”

A similar view was expressed by Joseph Porter Jr. of the St. Louis office of the law firm Polsinelli PC at the Missouri Bankers Association convention in June. Prices, though rising, are at historical lows, he noted, which means a buyer can gain market share in current markets; enter or expand in new, complementary markets; build loan and deposit bases; and retain the seller’s key loan officers.

He warned, however, that “buyer expectations of a good bank for book value aren’t going to happen.”

A pair of timely articles in this issue of BankNews sheds some light on the current environment for both buyers and sellers. On page 16, Bob Wray, president and CEO of The Capital Corp., which handles M&A transactions for community banks in Kansas and Missouri and nearby states, advises looking beyond the average published price/book and price/earnings multiples when valuing a potential sale or acquisition. And on page 23, attorneys at Polsinelli PC examine issues involved in mergers of equals.

The uptick in mergers is a good sign for the economy and reflects improving health for community banks generally. But for those who lament the falling numbers through consolidation, the trend is probably a mixed blessing.

Bill Poquette is editor-in-chief of
BankNews magazine.

Copyright (c) August 2014. BankNews Media.