Expectations +/- Capacity

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Heading up to 8 at the Four Seasons

The topic of a seller’s expectations and a buyer’s capacity is particularly relevant in light of what Cathy Nash and Jim Wolohan of Citizens Republic Bancorp shared earlier today.   Given that our economic environment is challenging, valuations are depressed and size and scale matter now more than ever, we turned our attention to matters like pricing expectations and the overall state of our financial community by welcoming Ben Plotkin, Vice Chairman of Stifel, to the stage.

Noticeably absent from the bank M&A market in 2012 were the “mega-deals” of years past that have often helped stimulate takeover activity. As I wrote about earlier today, the market made a modest rebound last year, with 230 acquisitions of healthy banks totaling $13.6 billion. But while there were only 150 bank deals in 2011—the third lowest volume since 1989—they totaled $17 billion.  While low levels of loan growth and continued net interest margin compression continue to challenge banks, there is “good news” according to Ben:

  • Profitability has improved (*primarily due to credit leverage);
  • Capital levels are at 70-year highs;
  • Valuations have improved significantly; and
  • M&A discussions are elevating.

To this last point, Ben cites capital access (or the lack thereof) as the driver of consolidation. Thanks to recent stock appreciation, potential buyers enjoy an increased capacity to pay meaningful premiums for smaller institutions and still preserve tangible book value.  As a result, larger institutions with access to the capital markets will most likely pursue M&A in order to overcome their more organic growth challenges.  

On the flip side, smaller institutions, especially those perceived by the investment community as not being able to earn their cost of equity and unable to access the marekets, may consider an “upstream” partnership.  In closing, Ben reiterated that asset growth is essential in order to create the revenue necessary to overcome the cost of doing business.

As with Cathy and Jim, our thanks to Ben for sharing his time and thoughts with us this morning.

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