Community Banks, like the rest of the M&A market, are turning defensive. Most community banks are riding out the COVID-19 pandemic with a wait-and-see stance. Because there are still big question marks about the duration of large-scale shutdowns of community bank customers across the board, it is likely that a majority of community banks are hesitant or unable to restart M&A plans at this point.
According to data from S&P Global Market Intelligence, during the first three months of 2020, 39 U.S. whole bank M&A deals were announced for an aggregate reported $6.6 billion, compared to 47 deals worth $6.7 billion in the same period last year (excluding BB&T’s $28.3 billion acquisition of SunTrust). This was the lowest number of completed deals in any quarter since the first quarter of 2011 when 33 deals were announced.
In addition, for deals with complete information available data, median price-to-tangible book for the first quarter of 2020 was 156.3%, down from 170.5% for the fourth quarter of 2019 and down from 159.0% for all of 2019.
Source: S&P Global Market Intelligence Transaction Database
At Wipfli LLP and Wipfli Corporate Finance Advisors, Wipfli’s investment bank, we have seen many deals put on pause as a result of buyers and sellers exhibiting caution.
How future bank M&A activity may change
In time, the COVID-19 risk will subside, and buyers will again be looking for opportunities to acquire quality institutions.
Loan diligence, which had already taken on an outsized portion of overall M&A diligence, will become an even larger focus. How well a bank’s loan portfolio reacted during this current disruption will go a long way in determining the size of premium a buyer will be willing to pay.
Acquirers will likely spend a material amount time understanding and assessing a target institution’s technological infrastructure and capabilities. The Safer-at-Home policies enacted by a majority of U.S. governors has provided a strong competitive advantage to financial institutions who were able to continue their operations with less disruptions as their remote workforce leveraged in-place technologies.
Finally, buyers will be keenly focused on earning capacity with the backdrop of near-zero interest rate policy enacted by the Federal Reserve. Already squeezed net interest margins will become even more pressured during the remainder of 2020 and into 2021. Financial institutions that have invested in noninterest-income-producing services and focused on efficient operations should stand to separate themselves from their peers.
For these and other reasons, we anticipate deal values will, on average, be smaller in the future, and the range of deal multiples paid could be larger than it has been of late.
If you are contemplating the acquisition of another institution or are trying to decide when is the right time to market your institution, you can be assured Wipfli’s advisors and Wipfli Corporate Finance Advisors’ senior bankers have the deep and well-rounded experience to guide to a great outcome.
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