It looks like we’ll end 2017 with a total of 263 bank and thrift transactions, representing a slight increase in the number of deals over 2016 (250), but well below 2014 and 2015 levels (307 and 294, respectively). However, in light of the decline in total number of banks (and the dearth of de novo activity), 2017 basically equaled 2014 and 2015 transaction activity, with approximately 4.5% of institutions at the beginning of the year exiting through a business combination. (2016’s 250 transactions represented approximately 4.0% of the outstanding banks at the beginning of 2016.)
Until and unless we see more de novo activities, it seems unlikely that we will return to 300 transactions in any given year. However, on an annualized basis, the fourth quarter of 2017 saw 296 transactions! Were 2018 to keep up that pace, over 5% of the remaining banks in the country would need to sell. Each institution’s decision to sell remains subject to a number of unique considerations, but, if anything, it would seem the percentage of institutions selling in any given year would likely decline rather than increase going forward.
We are strong proponents of the proposition that “banks are sold, not bought.” The fact that there remain a number of institutions looking to grow by completing acquisitions is thus unlikely to fundamentally change the number of transactions in any particular year. Conversely, the age and stage of banks in the industry (and that of their management teams) remains a critical component of many sale determinations. As we continue to see a shrinking universe of financial institutions, it stands to reason that we will also continue to see a decline in the number of institutions that decide a sale is the right strategic decision in any particular year.
2017 reflected, consistent with recent trends, a continued increase in the average price-to-book multiple paid in bank transactions. While the average price-to-book multiple in 2014, 2015 and 2016 were each approximately 1.3 times book, average pricing in 2017 rose to almost 1.6x book. This level of pricing likely continues to serve as a negative deterrent to de novo formation, as it’s much easier to build a broadly attractive investment model if it includes a sale for 3x book in 5 years (or less). Looking at a more granular, quarterly, level, it would appear that the 2017 increase is likely tied to the “Trump bump” in bank stock prices. The average price-to-book multiple rose to 1.4x in the fourth quarter of 2016 (which included pre-and post- Trump bump prices), and then jumped up 1.5x to 1.6x for each quarter in 2017.