What Drives Pricing in Midwest Bank Acquisitions?
February 16, 2023
By Lindy Ireland, Vice President and Shareholder
The topic of bank value is a favorite discussion among bankers. If you are like most bankers, you have a sense of the multiples of book value at which banks have recently traded in your area and around the state. Information about recent sales often spreads like wildfire throughout the banking community with the most extreme examples (and rumors!) getting the most airplay. In the bank valuation practice at BCC Advisers a question I am frequently asked in conversation with bankers is, “What are you seeing in bank multiples?” I’m happy to share that information – but it may not give you much of an indication of the value of your bank.
For this discussion, I reviewed bank sales involving target banks with specific characteristics: profitable community banks in the Central U.S. with assets under $1.5 billion, not in a major metro area (i.e., not Chicago, Minneapolis, etc.). Multiples of book value in this group have ranged from .28 to 2.87 during the last five years – a very wide range for a group with a good deal of characteristic similarity. During 2022, bank sales were fewer and the range of multiples narrowed to between 1.10 and 1.86. The general rule over time is that more profitable, well-capitalized banks command higher multiples. No surprise there! A premium also appears to exist for larger banks and those in larger MSAs (Metropolitan Statistical Areas). However, the normal criteria seem to have been joined by other prevalent factors in recent years.
So what factors are impacting bank pricing now? Another way to ask this is, “What factors are motivating bank buyers?” Here are a few:
Market area expansion. Acquiring a profitable existing bank rather than starting a de novo branch is a great shortcut for a bank to expand its market area. For this reason, a nearby bank may likely be willing to pay more for your bank than one a few hours away.
Removing a competitor. The acquisition of a nearby bank has the added advantage of removing a local competitor.
Acquiring experienced leadership. A common stressor for banks in small towns in more rural areas is addressing the loss of senior leadership – especially a lender. For a bank in a small community, the local area is often unfruitful recruiting ground, and attracting a lending executive to relocate to a small town is an uphill battle in many cases. For a very small bank with one main lender, the risk is especially high and these banks are increasingly disappearing from the Midwest’s rural landscape.
Certainly, profitability is still a strong motivator, along with a buyer’s desire to increase lending limits or expand service offerings (insurance, trust, real estate, wealth management) and other factors specific to a buyer.
So that covers the likely motivations of a bank buyer. But what about the rest of the story? What is most likely to move a bank owner to sell? This is an easy one. With very few exceptions, the overriding reason a bank decides to sell is ownership succession. Community bank shareholders are an aging group, on the whole, especially those with a controlling interest. In the absence of a clear ownership succession plan, the outcome is often the sale of the bank. This is sometimes coupled with a lack of a management succession plan. In some cases, when leadership retires, replacements are not readily available. Again, this is more prevalent in smaller communities.
So, can multiples provide an indication of the value of your bank? Maybe. Recent sales are certainly a factor in determining bank pricing, but motivations of both the buyer and the seller are likely to affect the final negotiated price.