What is your bank worth?

Wade Wacholz
Wade Wacholz

We’ve come a long way from the dark days following the Great Recession. Overall economic growth has been steady if not spectacular. Interest rates have been held at historic lows, but are finally starting to rise. Tax reform has lowered business tax rates. There is hope that the tsunami of regulation is slowing, if not receding. Based on these factors, most banks are showing improved earnings and improved prospects.

Strength in earnings and improvement (both perceived and real) in the business climate are driving higher bank valuations. Buyer proposals are stronger, especially when the acquirer can demonstrate achievable economies of scale from the acquisition.  When buyers are stronger, seller price expectations in bank acquisition transactions move higher.

It is certain that concerns and questions remain present. Will regulatory burdens actually modulate to a more realistic and sustainable level? What will it cost to develop and implement the technology necessary to attract and keep the next generation of quality customers, while meeting the mounting challenges of cybersecurity? How will changes in demographics and use of technology effect the number, location and size of branches? What is the right size for a bank in this environment?

Despite all of the complex factors and questions, recent reports show steady upward movement in acquisition prices. Nationally, according to SNL Financial and Piper Jaffray, the ratio of deal value to tangible book value is exceeding 1.75 to 1 in 2018, as compared to 1.6 to 1 in 2017 and 1.25 to 1 in 2013. Most transactions nationally involve banks under $500 million and principally in the Midwest region. The market favors the achievement of operating scale, at least up to a point.  The highest multiples are being paid for banks in the $2.5 billion and above asset class, where price to TBV ratios run at an average close to 2.0 to 1. Banks below $500 million in assets are drawing prices at lower levels – around 1.5 to 1 – demonstrating the difference size makes for shareholder value.

In Minnesota, since 2014, announced deals ratios ranging between 1.25 to 1 and 2.0 to 1 and recent deals have been closer to the higher end of the range.  Overall the “tailwinds” of lower taxes, higher interest rates, and steady to strong economic growth are anticipated to outweigh the “headwinds” of regulatory burden, technology costs and increased cost of funds.

Many banking organizations are reportedly also exploring growth through non-bank acquisitions, including insurance, broker-dealer, wealth management, trust services and specialty lending. Growth potential based on non-bank revenue streams that do not require substantial balance sheet support will also enhance valuation. Finally, the market is beginning to see impacts from the “FinTech” entrepreneurs who use increasingly sophisticated technology platforms to build new financial service revenue sources such as peer lending, money management services, investment advisory tools and enhanced cybersecurity systems, including utilization of block chain technology.

Overall, buyers will likely continue to seek optimal scale and will be willing to pay premiums where they see bank business portfolios which are financially, geographically and demographically well rounded.  For sellers who hold desirable market niches, unique and growing revenue streams (from both traditional banking and non-banking sources) and solid track records, values will continue to strengthen.

Editor’s Note: This article originally appeared in the Summer 2018 edition of the Gislason & Hunter Financial Newsletter. Reprinted with permission.