How much M&A will we see in 2015?
Institutions nationwide saw improvements in credit quality and higher loan growth in 2014. As they look to continue the positive trend, we are likely to see increased activity in the mergers and acquisitions (M&A) market. With the number of commercial banks continuing to decrease, 5,636 as of Q3 2014 from 6,110 as of Q3 2012 according to FRED data, many expect the overall number of commercial banks to decrease even further – largely as a result of M&A activity rather than bank failures.
Bank Director recently sought feedback from over 200 senior executives and directors at banks nationwide through their 2015 Bank M&A Survey, sponsored by Crowe Horwath LLP. Over 60 percent of respondents represented banks under $1 billion in assets, both private and public.
According to the survey, 95 percent feel the current M&A environment is equally or more favorable than 2013. Respondents cited increases in the number of banks interested in selling, improved credit quality, improved stock valuations, more capital and a stronger economy among the top reasons why.
But those that feel the market is less favorable highlighted opposing views of the same areas: capital constraints, stock valuations remaining below pre-crisis levels, banks reluctant to sell and high seller expectations. What gives?
Interesting to note: almost 50 percent of survey respondents say they plan to purchase a healthy bank over the next year; however, over 85 percent say their board doesn’t intend to sell during that timeframe. With that said, 70 percent do say selling would be considered if they received an attractive offer. In an improving market, bankers clearly see the opportunity for growth and prefer to either remain independent or be the one acquiring – not the one being acquired.
For banks considering an acquisition, what are the main challenges? The top three from Bank Director’s survey were culture fit, coming to an agreement on the right price and the strategic alignment of corporate objectives.
The 40 percent of respondents who completed a merger or acquisition since 2011 agreed, citing that the most difficult aspects were the post-merger integration, assessing credit quality issues and negotiating the right price. That said, the majority indicated that their strategic goals were met in areas like growth in market share, improved earnings per share, credit quality and culture fit.
On the sellers’ side of M&A, respondents indicated the following top reasons for considering a sale: receiving an attractive offer, the high cost of regulation and limited opportunities for organic growth. Those opposed to selling highlighted their top reasons, too: desire to remain independent, current pricing being too low and no potential and/or suitable buyers.
The good news for the banking market as a whole is that confidence is high: over 60 percent expect to thrive as an independent entity over the next 24 months. When it comes to meeting the demands of Basel III and driving growth and acquisition strategies, over 80 percent say their bank has adequate access to capital.
Despite the confidence among survey respondents, banks will continue to propose M&A deals moving into 2015. And when conditions are favorable and/or the price is right, they will ultimately be accepted.
For more on the 2015 Bank M&A Survey, access the full results here.
A common difficulty for institutions during M&A is the additional complexities associated with purchased loans. Bankers can access a complimentary whitepaper on accounting for purchased loans that explains fair value accounting, how to classify loans and the calculations to use.