On the second day of Bank Director’s Acquire or Be Acquired (AOBA) Conference, we were honored to co-host with FIG Partners for the second year, the M&A Simulation. The M&A Simulation is an exclusive, bankers-only, session at AOBA that attempts to walk through the initial stages of a bank merger. Like last year, we divided the attending bankers into three groups, representing the boards of directors of three distinct participants: Bank A, a $700 million bank looking to sell, and Banks B & C, two larger potential acquirers.
This is the second of several podcast episodes we recorded in Phoenix. Sound quality isn’t quite as good as you may have come to expect as we’re back on an older microphone, but we jumped at the opportunity to be able to share our conversations with so many interesting colleagues at Acquire or Be Acquired. We hope you enjoy the conversation with Matt and Dan as much as we did. We’re already planning a few new tricks for the M&A Simulation at the 2019 Acquire or Be Acquired Conference, and hope you’ll look to join us then.
For the next several The Bank Account episodes, we’re on the road at Bank Director’s Acquire or Be Acquired (AOBA) Conference. In our first installment from AOBA, we highlight our respective take-aways from the first day of AOBA and then sit down with Rory McKinney, Managing Director and Head of Investment Banking for D.A. Davison & Co. to discuss Rory’s outlook for bank M&A activity in 2018.
This is the first of several podcast episodes we recorded in Phoenix. Sound quality isn’t quite as good as you may have come to expect as we’re back on an older microphone, but we jumped at the opportunity to be able to share our conversations with so many interesting colleagues at Acquire or Be Acquired. We hope you enjoy the conversation with Rory McKinney as much as we did.
It looks like we’ll end 2017 with a total of 263 bank and thrift transactions, representing a slight increase in the number of deals over 2016 (250), but well below 2014 and 2015 levels (307 and 294, respectively). However, in light of the decline in total number of banks (and the dearth of de novo activity), 2017 basically equaled 2014 and 2015 transaction activity, with approximately 4.5% of institutions at the beginning of the year exiting through a business combination. (2016’s 250 transactions represented approximately 4.0% of the outstanding banks at the beginning of 2016.)
Until and unless we see more de novo activities, it seems unlikely that we will return to 300 transactions in any given year. However, on an annualized basis, the fourth quarter of 2017 saw 296 transactions! Were 2018 to keep up that pace, over 5% of the remaining banks in the country would need to sell. Each institution’s decision to sell remains subject to a number of unique considerations, but, if anything, it would seem 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.
2017 reflected, consistent with recent trends, 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 rose to almost 1.6x book. 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). Looking at a more granular, quarterly, level, it would appear that the 2017 increase is likely tied to the “Trump bump” in bank stock prices. The average price-to-book multiple rose to 1.4x in the fourth quarter of 2016 (which included pre-and post- Trump bump prices), and then jumped up 1.5x to 1.6x for each quarter in 2017.
For Subchapter S institutions, tax reform offers/requires a re-evaluation of the tax consequences of a Subchapter S tax election. While institutions regularly assess the overall tax difference involved in a Subchapter S tax election at the time of making the election, that analysis is often then put in the closet, and only rarely re-addressed upon future strategic decisions. However, with the decline in the corporate tax rate to 21%, it now behooves Subchapter S institutions, particularly those that retain a significant amount of their earnings to support future growth, to update that analysis. Jonathan and I discuss some of the factors affecting that analysis, as well as the timing implications to make effective for 2018.
Looking at the final M&A statistics for 2017, it looks like we’ll end the year with a slight uptick in the number of deals (259, up from 250 in 2016), but remain significantly below 2014 and 2015 levels. In addition, the average size of the selling banks in 2017 has declined significantly (almost 25% smaller, based on averages). Jonathan and I discuss these trends, and make a few predictions on M&A going forward.
stock market performance (banks down for the six months, but still way up over the last 12 months);
merger and acquisition activity (same number but larger than last year, plus a more in depth look at North Carolina);
de novo activity (or lack thereof);
regulatory relief (and definitely lack thereof); and
capital raise activity (going strong).
We also congratulate each other on finishing the Peachtree Road Race (Jonathan’s first, my fiftheenth) and Jonathan shares a story where he seems to have exchanged an unfortunate woman’s micro-humiliation related to a debit card denial to a larger humiliation due to poor interpersonal skills. With this episode we are fully switching to our summer schedule, so the next episode will be in a couple weeks.
You can also always follow us on Twitter. Jonathan is @HightowerBanks and I’m @RobertKlingler. I promise to try to restrain Jonathan from humiliating you on Twitter in the event that you decide to follow us.
As part of an international law firm, the attorneys practicing in Bryan Cave’s financial institutions practice also have the advantages of an extremely deep bench in completing all types of merger and acquisition transactions. Bryan Cave is ranked among the top legal advisers for M&A work involving a U.S. target for 2011, according to recently released data by Thomson Reuters.
The firm is ranked sixth based on the number of transactions completed involving a U.S. target, with 101 completed transactions during the year. Additionally, the firm ranks 22nd for completed transactions worldwide with 116 deals closed.
Thomson Reuters, recognized as maintaining the most comprehensive database available on mergers and acquisitions, noted in its full report that while the value of worldwide mergers and acquisitions was up from comparable 2010 levels, the number of deals was down 5.5 percent compared to last year.
“Our transactional practice enjoyed a very impressive year in 2011 by any measure, especially relative to our peers,” said Bill Seabaugh, head of the firm’s Transactions Group. “Globally, 2011 was a down year for M&A activity, but Bryan Cave’s completed deal activity was up more than 20 percent compared to 2010, which was itself a very active year for us. These results confirm that our clients continue to see an exceptional combination of quality, service and value in our global transactional practice.”
Click here to view Bryan Cave’s rankings by Thomson Reuters.
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