In the months during and following the Great Recession, analysts predicted a large wave of bank failures and massive consolidation within the banking industry, essentially wiping out approximately 30 to 40 percent of the existing banks. According to FDIC data, however, the decline has been much less severe. Since 2008, we have witnessed the closing of approximately 460 banks nationwide, as well as a similar number of traditional acquisitions—both statistics a far cry from the 40 percent consolidation predicted.
Total Banks in the US at Year End and most recent Quarter End (Source: FDIC).
Does this mean that the merger and acquisition (M&A) wave actually missed the US banking market? We believe that the industry, more likely, has just experienced the first of many smaller waves of consolidation—with another wave that could come during the next year.
Signs of renewed M&A vigor.
Several factors make the banking industry ripe for renewed mergers and acquisitions in 2013.
First, several trends and developments may compel institutions to sell:
At the same time, other trends may be favorable for banks that are looking to buy:
One other trend to watch is a potential reversal of the low volume of traditional “non-assisted” mergers. To this point, buyers and sellers have had misaligned perceptions of value, and the resulting gap has served to limit potential transactions. Recent announcements of unassisted transactions such as the Columbia Bank purchase of West Coast Bank (Pacific Northwest) at approximately 1.5 times book value will help to define the market valuation reality and provide a comparative price point. Most likely, these types of events will open doors to other merger and acquisition activity.
If your strategy involves M&A, it will pay to be prepared.
From these trends and developments, it appears that community and middle market banks will continue to be adversely affected by the regulatory environment and financial risks that currently surround them. As a result, many directors and executives will look towards a strategy of merging or selling the institution as a feasible reaction to the increased pressures. This, coupled with a potential new wave of bank closures resulting from heightened capital requirements, will likely continue—and possibly escalate—the trend toward consolidation within the banking market during 2013.
On the other hand, banks that are in a strong financial position with healthy capital levels will find themselves very much in a buyer’s market—and with some significant potential opportunities to reap benefits in the next wave of industry consolidation. If your bank is a potential buyer, what should you be doing to prepare? These are just a few of the essential steps:
West Monroe Partners assists an array of financial institutions with evaluating and executing mergers, acquisitions, and other transactions. For more information, please contact Neil Hartman or Ken Siegman.