BID® Daily Newsletter
Nov 5, 2024

BID® Daily Newsletter

Nov 5, 2024

How Much Is Your CFI Really Worth?

Summary: Sales data suggests a gap between buyer and seller price expectations in M&A. CFIs can maximize value by finding strategic business combinations that leverage both sides’ strengths and minimize weaknesses.

No doubt, you’ve heard some version of the phrase “Everything is worth what its purchaser will pay for it.” The maxim, first attributed to Publilius Syrus, a Latin writer, may be very true for artwork and goods that are either one of a kind or have sentimental value, it’s a bit less applicable in the business world. Properties and companies have market values that fall within ranges. As long as the agreed-upon price falls within the acceptable range, third parties might shrug their shoulders as to whether the deal is in the seller’s favor or the buyer’s. With the market changing so rapidly, if an investor or another financial institution knocks on your door with an offer to purchase your institution, how can you determine if the offer is fair?
Let’s start by looking at the M&A market. After a comparatively slow 2023, bank mergers and acquisitions have picked up in 2024. According to S&P Capital IQ Pro, banks announced 93 M&A transactions through September 30, 2024. All of 2023 saw 102 financial institutions change hands, so this year will likely conclude with a higher total.
The same report said that aggregate deal volume reached $11.42B by September 30, nearly triple the $4.2B for 2023. So far, 2024 has 3 deals worth $1B or more, compared with one each in 2022 and 2023, and the median price/earnings multiple increased from 12.4x in 2023 to 17.1x in 2024. Those are all reasons for cautious optimism.
110524-S&P Global M&A report chart.png 139.87 KB

Source: S&P Global Market Intelligence 

However, a disconnect remains between what sellers expect and what buyers are willing to pay. For instance, the median deal value-to-tangible common equity ratio dropped from 153.4% in 2022 to 124.5% in late 2023. Community financial institutions (CFIs) looking to sell can help close this gap by considering key factors in determining a fair price for their institution.
Factors Determining a CFI’s Value
Of course, there are obvious factors that go into determining the value of an acquisition, such as the assets of both the buyer and seller and how those assets fit together to make the combined entity greater than the sum of its parts. 
  • Strategic considerations. Previously, buyers might prioritize a larger customer base or geographic expansion and work out the integration details later. Today, CFIs looking to acquire are much more strategic, assessing long-term growth prospects and strategic fit. CFIs with a compelling strategic alignment with potential buyers can improve their prices by presenting themselves as opportunities for true growth rather than just assets to be absorbed. 
  • Economic context and market trends. Overall economic conditions matter, too, as does the health of the financial sector. Right now, net interest margins are likely to expand. Potential problems with asset quality are still possible, as are changes to the economy in the wake of this year’s presidential election.
  • Accumulated other comprehensive income (AOCI) and fair value adjustments. When a CFI changes hands, its balance sheet, including loan portfolios and bond holdings, is marked to market. Adjustments can be substantial and have implications for regulatory capital ratios and profitability, as well as for a CFI’s ultimate selling price.
  • Regulators. The FDIC and Federal Reserve take a keen interest in proposed bank M&A deals. Getting their okay can be a long, complicated process that puts risk management measures, capital sufficiency, financial stability, and competition under the microscope. Delays or rejections can botch a sale, so any CFI considering M&A needs to stay up to date in these and other areas. Doing so may increase your value to a potential purchaser or might increase the amount you’re willing to pay for another financial institution.
  • Golden parachutes and similar agreements. Golden parachutes — money paid to outgoing executives at a purchased company — and other binding obligations around staffing or compensation can drive down a CFI’s market price.  
All other things being equal, CFIs can maximize their value by seeking out strategic business combinations that leverage both sides’ strengths and minimize their weaknesses to create mutually beneficial deals. Valuations may also increase when CFIs have strong assets, are up to date with regulatory requirements, and offer deal terms that minimally restrict a purchaser. 
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