The banking industry has seen a run of large deals over the last month, and 2017 has been the busiest year for $100 million deals since 2007.
Investment bankers mostly attribute the spate of deals to the run-up in stock prices and a need for banks to acquire scale to defray regulatory costs. The latest large deal, Pacific Premier Bancorp Inc.'s Aug. 9 pending purchase of Plaza Bancorp, represented the sixth deal valued at $100 million or more in the last 20 days. It came just one day after Old National Bancorp's $303 million deal to buy Anchor Bancorp Inc.
The latest deals put the number of $100 million bank deals at 34 so far this year, a 48% increase from the same time period a year ago. It is the highest number of large deals, year-to-date, since 2007. Thomas Michaud, CEO of Keefe Bruyette & Woods, said the fundamental drivers of M&A activity, such as cost savings and expansion into new markets, have been constant and that stock prices have been an important trigger in the recent run of deals.
"The typical regional bank in America over the past week or so has been trading at about 2.15x tangible book value. And that's for the median company," Michaud said. "It's given buyers a capacity to act, and I think those who've been willing to sell believe that they're getting a fair price on the way out."
Deal pricing has picked up, too. The median price-to-tangible book value for large deals has been 198% this year, up from 164% for the same time period a year ago. Investment bankers said they expect the active flow for large deals to continue.
"There's no shortage of conversations going on, both buyer-led and seller-led conversations," said Tom Hayes, a director in investment banking for D.A. Davidson. "A lot of groups have completed deals and they're asking, 'What's the next one? Where do we go from here?'"
Post-crisis regulation has played a significant role. The Dodd-Frank Act subjects financial institutions to significantly tougher regulation after crossing the $10 billion asset threshold, including stress testing, Consumer Financial Protection Bureau oversight and — perhaps most significantly — limits on interchange income due to a rule known as the Durbin amendment. That has led to some institutions seeking a large deal to "leap" over the threshold, providing a larger asset base over which a company can spread the regulatory costs.
First Financial Bancorp. took that route with its July 25 deal to buy MainSource Financial Group Inc. in a deal valued at roughly $1.0 billion, a price rich enough to trigger a sell-off. The combined bank will have roughly $13.3 billion in assets.
Size also helps banks drive revenue. KBW's Michaud said banks tend to generate more noninterest revenue after reaching $5 billion in assets. Expanded balance sheets allow banks to develop new products that diversify the business, providing both improved revenue and protection against one-off macroeconomic shocks.
"I think that diversification of revenue streams and clients and capabilities adds value to the overall enterprise. It's not just leveraging expenses — it's also being able to invest in a broader range of activities," Michaud said.
Timing is another factor driving deal activity, said R. Lee Burrows Jr., CEO of investment banking firm Banks Street Partners. There was a wave of private equity funds buying failed banks from 2008 through 2010. "The time to harvest for those banks has been in the last couple years, and it's been concentrated in this year because the pricing has been better," Burrows said.
At the same time, the overall number of deals is down. Investment bankers said that is largely because small banks eager to sell are having difficulty finding suitors. Small banks do not offer the ability to gain significant scale and they have been more hampered by regulation's fixed costs, translating to worse fundamentals such as higher efficiency ratios. Further, small banks might be wary of a thinly traded bank's stock that might not be liquid. Banks with more liquid stocks tend to be larger and more interested in banks of size. D.A. Davidson's Hayes said banks with $750 million to $5 billion of assets represent the "sweet spot" for potential deal activity.
"The buyer universe for the really small banks is tough," Hayes said. "When you have a $1 billion bank in an attractive market, there will be a lot of interest. If you have the same bank with $100 million of assets, the buyer universe is a lot different."
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