Will M&A continue in the banking market?
Guest post by Shea Dittrich, Director at Sageworks
As the banking industry continues its recovery, industry experts are monitoring merger and acquisition activity to better understand what the banking landscape will look like in years to come. Will M&A continue and in what form?
Everything points to an increase in M&A activity. At every bank and at every conference for the past few years, the question is raised: “What asset size will a bank need to maintain in order to be profitable?” While the likelihood of increasing M&A activity is strong, questions remain as to its proper form and timing. The uncertainty is exacerbated by an election year, the lack of transparency behind government regulations, and still-stagnant economic conditions.
Traditionally, bank M&A activity has consisted of healthy and performing banks acquiring smaller healthy and performing banks so that the acquiring bank can grow through scale and efficiency. That type of activity in recent years hasn’t been as robust as many expected. Instead, the deal-making that has taken place has taken many different forms.
One important type of transaction has been the “loss share agreement.” The FDIC actually introduced this in 1991 for some of the Purchase and Assumption agreements it oversaw for failed banks. Under loss share, the FDIC tries to maximize asset recoveries and minimize FDIC losses by absorbing a portion of the loss on a specified pool of assets as part of an agreement to sell the failed bank to another. This created a great opportunity for banks to enter markets where they felt that they could find success while minimizing the risk associated in the acquired portfolio.
While loss share assistance stimulated M&A activity and maintained stability in some markets, it left other undercapitalized banks in survival mode with very few options for attracting potential suitors or capital. During the nine years prior to 2009, only 52 banks in total were closed by the FDIC. Then in 2009, an incredible 140 banks were closed. With a bank closing nearly every week, healthy banks were active participants in the bidding process. In fact, 129 of the 140 failed banks were sold to an acquiring institution. Furthermore, the process was competitive, as over 350 bids were submitted for FDIC approval. Today, M&A activity driven by acquisitions involving loss share assistance has dramatically decreased from its 2009 high. Through May 31, 2012, 24 banks have been closed this year. At this pace, the number of failed institutions would finish at 30-35 percent of the 2009 number.
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