Economic and regulatory uncertainties are continuing to depress mergers and acquisitions (M&A) activity in the banking industry.  June job growth of only 18,000 new jobs continued several months of anemic growth and led to a slight increase in the unemployment rate from 9.1 percent in May 2011 to 9.2 percent in June 2011.  In June, the Federal Reserve revised its economic growth forecast for United States Gross Domestic Product (GDP) in 2011 to a range of 2.7 percent to 2.9 percent.  This is down from a range of 3.1 percent to 3.3 percent in May and a range of 3.4 percent to 3.9 percent in April.

The uncertain impact of changing banking regulations and the burden of regulatory reform continues to concern the industry.  In a Grant Thornton study produced in the first quarter of 2011 in association with Bank Director, 91 percent of bankers cited the regulatory burden as a concern for their institution.  Even as more regulations are finalized, the direct financial impact on the industry remains uncertain and deeply feared.

These uncertainties are making it exceedingly difficult for buyers and sellers to arrive at an agreed upon price for banks.  Buyers have become increasingly cautious and picky, leading some to hold out until they can find banks priced so low that the acquisition will immediately increase earnings.  This has pushed some sellers to reconsider due to depressed valuations.

Even with the depressed M&A activity, industry trends continue to put pressure on many banking institutions.  Operating revenue is facing significant pressure, and the long-term downward trend is hitting small banks the hardest.  As a percentage of average assets, operating revenue at banks with $100 million to $1 billion in assets fell to 4.37 percent as of March 31, 2011, down from 4.44 percent as of December 31, 2010, and 5.74 percent at the end of 2000.  In comparison, operating revenue as a percent of average assets at banks with more than $1 billion in assets was 5.03 percent as of March 31, 2011.

Overdraft rule changes are taking a heavy toll on smaller banks.  For banks with assets of $100 million to $1 billion, first-quarter revenue from service charges on deposit accounts dropped 17.85 percent to $677.2 million, compared with a year earlier, according to Federal Deposit Insurance Corporation data.

Continued fee pressure, weak loan demand and low investment returns will push operating revenue lower for the foreseeable future.  The long-term options for many small banks are limited and may come down to change drastically, acquire, sell or fold.  In the short term, uncertainty in the economic and regulatory environment may continue to depress banking M&A activity over the next three to six months.

M&A Activity – BKD Service Area*

There were six bank/thrift transactions announced in the BKD service area during the second quarter of 2011.  The median price to 7 percent equity multiple and median price to tangible equity multiple were not included this quarter due to a lack of disclosed data.

Publicly Traded Bank Metrics – BKD Service Area*

All of the tracked publicly traded bank valuations have increased from Q1 2011 to Q2 2011.  Price to earnings and return on average equity showed increases from 9.76 to 12.10 and 5.38 to 6.06, respectively. Chart 1 and Chart 2 provide more detail by month.

*The charts above illustrate recent valuation trends in the BKD service area:  Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Mississippi, Missouri, Nebraska, Ohio, Oklahoma and Texas.

Failed Bank Statistics

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