2018 was only the fourth most active year over the last five years in terms of the number of insured institutions that agreed to sell. However, perspective is also important, as 2018 was also the fourth most active year over the last ten years, and the most active if measured as a percentage of institutions available to sell. 2018’s 262 bank and thrift deals ended up slightly lower than 2017’s 267 transactions. Based on the 6,670 insured banks and thrifts outstanding as the beginning of the year, 4.6% exited through a business combination.
Until and unless we see significantly more de novo activities, it seems unlikely that we will return to 300 transactions in any given year, as we last saw in 2014. However, on an annualized basis, the second quarter of 201 saw 336 transactions! Similarly, looking at a four quarter rolling total, we had more than 280 deals announced both between Q3 ’17 and Q2 ’18 and between Q4 ’17 and Q3 ’18. Each institution’s decision to sell remains subject to a number of unique considerations, but, all else equal, we would expect the percentage of institutions selling in any given year would likely decline rather than increase going forward.
We are strong proponents of the proposition that “banks are sold, not bought.” The fact that there remain a number of institutions looking to grow by completing acquisitions is thus unlikely to fundamentally change the number of transactions in any particular year. Conversely, the age and stage of banks in the industry (and that of their management teams) remains a critical component of many sale determinations. As we continue to see a shrinking universe of financial institutions, it stands to reason that we will also continue to see a decline in the number of institutions that decide a sale is the right strategic decision in any particular year.
2018 reflected, consistent with recent trends – although perhaps not yet reflecting the year-end stock declines – a continued increase in the average price-to-book multiple paid in bank transactions. While the average price-to-book multiple in 2014, 2015 and 2016 were each approximately 1.3 times book, average pricing in 2017 and 2018 has risen to 1.6x book, with 2018 slightly higher than 2017. This level of pricing likely continues to serve as a negative deterrent to de novo formation, as it’s much easier to build a broadly attractive investment model if it includes a sale for 3x book in 5 years (or less).
2018 marks the seventh straight year with over 240 transactions announced during the year, and the fifth straight year in which more than 4% of the institutions at the beginning of the year sold. Based on these trends, and without attempting to identify how the financial sector’s market decline will impact M&A activity, this would point to between 217 and 250 deals to be announced in 2018.