Authored by: Tim Kosiek
Bank Director held the Acquire or Be Acquired Conference (AOBA) in Arizona last week. It was the most attended year in the conference’s history with over 1,100 bankers and vendors, which might give you an indication of the level of interest merger and acquisition activity is currently attracting within the community banking industry.
Merger and acquisition (M&A) activity on the rise
Some of the key discussion points from presenters indicated there is likely to be robust M&A activity in the next 18 to 24 months.
- Stockpile of capital: Community banks have been stockpiling capital since the November 2016 election, taking advantage of increased availability and attractive pricing. Many believe a substantial amount of the capital has been accumulated to prepare for M&A activity in the coming months.
- Valuations are up and trending to the positive: Also since the election, banks, other than those of generally less than $300 million in assets, have seen a measurable increase in valuations. This increase is expected to be sustained, and potentially increase, over the next 6 to 9 months. This is due, in part, to the expectations for stronger economic growth, regulatory relief on selected aspects of Dodd Frank, and the potential for a less aggressive approach from the Consumer Financial Protection Bureau (CFPB).
- Premium pricing for over $1 billion and $2 billion: The presenters were in agreement that banks over the $1 billion threshold continue to experience valuations at a measurable premium to those with assets of less than $1 billion, and those over the $2 billion asset mark are likely to experience an even higher premium. This dynamic is expected to drive continued consolidation at the lower end of asset size spectrum, including an increased level of deals amongst banks in the under $300 million asset segment.
Fintech: Build it, buy it or partner with it
Banks are weighing the costs and rewards associated with acquiring new Fintech startups, forming strategic partnerships with established ones, or building their own applications to layer on top of an existing business model. The strategic choice that banks make may matter less than the absence of taking any action, which can hamper competitiveness and ultimately affect their valuations.
BSA and AML are here to stay
There was general consensus that there would not be any relief in the areas of Bank Secrecy Act (BSA) or Anti-Money Laundering (AML) in the near future. Banks with issues in these areas may have significant hurdles to overcome as both potential buyers and sellers.
Richard Davis, CEO of US Bancorp, in his keynote message said that the banking industry is entering a period of “significant consequence”. This will be a time of great movement within the banking industry. Banks should position themselves to take advantage of the change and adapt. Merger and acquisition strategy will directly impact your ability to be profitable, sustainable and innovative.
For more information on this topic, or to learn how Baker Tilly banking specialists can help, contact our team.