Pub. 9 2020 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 22 BANK MERGERS & ACQUISITIONS OUTLOOK & REVIEW IN THE MIDDLE OF UNCERTAINTY By Wyatt Jenkins, CPA, VP, BKD Capital T he spread of the coronavirus, or COVID-19, presents considerable risks to the world economy in general and the banking industry specifically. By some estimates, China saw economic activity cut in half as it worked to treat those infected and control the spread of the virus. World economic activity may rebound quickly if the virus is quickly contained, but the virus’s spread and efforts to contain it may create significant challenges for the banking industry. The Federal Reserve has taken decisive action and pledged further action, if necessary, to support the economy in the face of the virus outbreak. After three interest rate cuts from the Federal Reserve in 2019, falling interest rates in 2020 could combine with credit challenges from even a temporary economic slowdown to sharply cut into bank profitability. This comes on top of ongoing competitive challenges and the upcoming presidential election, which could insert significant ambiguity into the regulatory environment. Setting coronavirus-related uncertainties aside for a moment, acquirors continue to see significant opportunities in bank mergers and acquisitions (M&A), and the forces that bring sellers to the market are likely to endure for the foreseeable future. In addition, due to the time required to complete a transaction, much of the 2020 M&A activity is currently deep in the pipeline. Thus, barring an extended economic slowdown, transaction activity in 2020 is likely to continue, though the pace will largely be determined by how long and how severe the economic issues remain. With 266 announced whole bank and thrift transactions as of December 31, 2019, M&A volume year over year was basically flat from the 257 transactions announced in 2018. Pricing in 2019 was down somewhat from the highs seen in 2018, with an average price to tangible book value (P/TBV) of 159% compared to 178% in 2018. From a regional perspective, Midwest transactions totaled 114 in 2019 compared to 115 in 2018, with an average P/TBV of 145% compared to 173% in 2018. In Kansas, there were eight transactions in 2019 compared to 13 in 2018, with an average P/TBV of 214% compared to 152% in 2018. The increase in P/TBV in Kansas in 2019 was driven by two transactions in metropolitan areas with high reported P/TBV: Heartland Financial USA, Inc.’s acquisition of Overland Park-based Blue Valley Ban Corp. at 187% P/TBV and CCB Financial Corporation’s acquisition of Olathe-based Prairie Star Bancshares, Inc. at 240% P/TBV. Large mergers of equals (MOE) in the banking industry were among the intriguing themes coming out of 2019. This has continued into early 2020 with the announced MOE between CenterState Bank Corporation and South State Corporation that would create a $34 billion asset organization in the southeastern United States. While MOEs are often talked about, they tend to be relatively rare. However, several banks appear to have taken a pragmatic approach to the current environment and looked to MOEs as an opportunity to achieve scale, drive efficiencies and enhance digital capabilities. Large mergers of equals (MOE) in the banking industry were among the intriguing themes coming out of 2019. This has continued into early 2020 with the announced MOE between CenterState Bank Corporation and South State Corporation that would create a $34 billion asset organization in the southeastern United States. While MOEs are often talked about, they tend to 0.00 0.50 1.00 1.50 2.00 2.50 2014 2015 2016 2017 2018 2019 Average Price / Tangible Book National Midwest Kansas