Banking brief: A bank consolidation wave is forming

As has been anticipated since the end of the Great Recession, a wave of bank consolidation is very much in formation and could swell to significant levels later in 2015. On its own merit, the increase in average pricing on Q1 2015 deals to a level of just over 150% of book value strongly indicates a more robust mergers and acquisition market for banks.

Adding to the anticipation of this wave are:

  1. The expected increase in interest rates in the second half of 2015 which is expected to contribute to stronger bank earnings;
  2. An ever-growing regulatory compliance burden that is likely to have a disproportionately unfavorable effect on smaller community banks;
  3. Expansion of non-bank participants into traditional and emerging lending markets, as well as on other bank services such as payment systems and mortgage servicing; and
  4. Rising regulatory capital expectations paired with earnings and capital formation challenges.

Banks looking to be sellers into this wave should focus on matters that will be critical to achieving the maximum value:

Continue and complete balance sheet "cleansing"

Problem assets and unstable funding sources should be reduced to a minimum, if not eliminated. The uncertainty attached to both of these balance sheet components is certain detractor from acquisition value.

Resolve regulatory hangovers

Regulatory consent orders and memos of understanding need to be resolved as promptly as possible. Although not a simple task, elimination of these barriers to effectively managing the bank is essential to achieving maximum value, and in many instances obtaining the necessary regulatory approvals to complete the transaction.

Clearly demonstrate strength and sustainability of market share

Acquirers of banks will need to achieve a high level of certainty concerning the earnings capacity and sustainability of the acquired bank. Presenting a convincing statement about the ability to deliver a long-lasting stream of earnings will be essential.

For more information on this topic, or to learn how Baker Tilly’s banking specialists can help, contact our team.