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Opinion: Bank M&As continue gaining momentum

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The bank mergers and acquisitions market is at its highest point in years, driven by higher interest rates, a bullish outlook on bank stocks, a strong economy, a more bank-friendly regulatory environment and lower tax rates.

According to S&P Global Market Intelligence, 2017 recorded 259 U.S. banking deals worth an aggregate $26.44 billion, compared with 239 deals worth an aggregate $26.81 billion announced in 2016. The median deal value to tangible book ratio climbed significantly in 2017 to 1.67x, compared with 1.37x for 2016.

Since the 2016 presidential election, financial and bank stocks have been on a run, with the S&P 500 Financials sector up 37.26 percent and the KBW Regional Banking Index up 22.51 percent. This increase in valuation has been good news for publicly traded banks looking at acquisitions, as buying banks has become an increasingly attractive approach to building shareholder value.

Many of the aggressive acquirers and strong institutions have seen their stock valuation increase above 200 percent of tangible book. M&A transactions using stock as currency become quickly accretive to capital and earnings with valuations at this level. A valuable currency in the hands of public banks combined with a positive outlook at many privately held institutions has created a very competitive market for selling banks. Together, these forces have pushed pricing multiples to levels not seen since the mid-2000s.

Through the first quarter of 2018, the market continued to be active with 56 deals announced, compared with 57 deals in first-quarter 2017. The median deal value to tangible book ratio continued to increase in first-quarter 2018 to 1.81x, compared with 1.67x for first-quarter 2017. The median deal value to last 12 months’ earnings ratio also increased in first-quarter 2018 to 26.04x, compared with 20.9x in first-quarter 2017.

However, while valuation is strengthening, community banks with less than $500 million in assets should still be somewhat cautious about value expectations. Many of the deals being announced at 2x tangible book, or better, are banks with more than $500 million in assets. In 2017 and first-quarter 2018, only 6 percent of deals involving target banks with $500 million or less in assets transacted at or above 2x tangible book. This compares with more than 48 percent of deals involving target banks exceeding $500 million in assets that transacted at 2x book or more over this same 15-month time frame.

In 2017, approximately 89 percent of transactions involving target banks with more than $100 million in assets reported stock consideration of 50 percent or greater, while 46 percent were reported as all-stock deals. However, experienced industry watchers caution reading too much into these numbers on reported consideration mix.

In 2017, only 56 percent of bank deals reported consideration. It’s likely most of the 44 percent of transactions with unreported consideration mix were community bank deals where little information was disclosed. Thus, it’s worth noting many community bank deals are still getting done with cash as the main form of consideration in the transaction.

With a robust outlook for the industry and a thriving bank M&A market, community bank boards should continue to proactively evaluate all their strategic options related to M&A on a regular basis. The friendly regulatory environment and strong economy likely will continue providing sustainable tailwinds for the banking sector and M&A valuation for the balance of 2018.

Wyatt Jenkins is vice president at BKD Corporate Finance LLC and leads the group’s financial institution mergers and acquisitions practice. He can be reached at wjenkins@bkd.com.

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