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									                                               A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES

                                                    V A L U A T I O N

        Bank Valuations: a Tough
         Environment for Bankers
              and Valuators
                                              by Scott B. McCallum, MBA

             ver the past 20 months, an unimagined series        2009——even after a significant rally during March——and off
             of events has caused a meltdown for banks and       64 percent over the prior 52 weeks.* The NASDAQ, by com-
             their stock valuations. The sub-prime debacle,      parison, was down a ““mere”” 3 percent year-to-date and 35
             the demise of Bear Stearns, the bankruptcy of       percent over the past 52 weeks. The SNL Bank Index now
Lehman Brothers, the government takeover of AIG, the             stands at the same level as it was back in 1996. (See Chart 1,
failure of Washington Mutual, the shotgun weddings of            page 20, for publicly traded bank pricing comparisons.)
Wachovia with Wells Fargo and of National City with                   While all of those forces have affected the entire bank-
PNC Financial, Treasury’’s Troubled Asset Relief Program         ing industry, the focus of this article will be on small and
(TARP), and displacement of private equity capital in the        medium-sized banks——those with less than $5 billion in as-
banking sector were sobering events, indeed. Throw in            sets——since they are mostly privately owned, closely held, or
a broad and deep recession, higher unemployment, low             thinly traded. This article will provide some background on
consumer and business confidence, dysfunctional credit           small and midsize bank valuation analytics, including the
markets, FAS 157 mark-to-market gyrations in bank invest-        fundamental drivers of a bank’’s franchise value, key valua-
ment portfolios, and declining values in residential and         tion metrics, and traditional bank valuation methodologies.
commercial real estate (the underlying collateral for bank       With that foundation, the focus will turn to the character-
loans and some structured investments), and you’’ve got a        istics of bank valuations prior to 2008, as compared with
recipe for one world-class problem.                              those in the more recent 2008-2009 timeframe, including
     For the first time in a generation, bank failures are on    implications on bank valuations of the recent deployment
the rise and, consequently, banks have gone into survival        of TARP capital. Lastly, I’’ll address two questions:
mode——hunkering down, protecting precious capital, cut-          •• What does all this mean for the valuation analyst?
ting or eliminating dividends, de-leveraging and reducing        •• What will trigger a return to the fundamentals for bank
risk, steering through the storm with hopes of better days          valuation?
down the road.
     I guess we shouldn’’t be that surprised to find that bank   Three Primary Valuation Drivers
stocks are down 37 percent year-to-date through March 31,            A bank’’s franchise value is fundamentally a function of

* Source: SNL Financial LC.

May/June 2009                 The Value Examiner                                                                            19

three primary drivers: earnings, core           financial institutions and non-              nature of its assets, the bank enjoys
deposits, and capitalization.                   financial firms. Core deposits, which        ““natural leverage”” to a significant
                                                typically exclude jumbo CDs and              degree, even though there may not be
1. Earnings are defined in terms of             brokered deposits, are difficult to          any ““borrowings”” in the traditional
   profitability (return on average assets      replicate, and they also produce fee         sense of the term. For every dollar
   and return on average equity) and            income. Banks with a high mix of             of equity, the bank can grow its
   growth prospects. A bank’’s net              low-cost core deposits tend to trade         assets to about $12, which implies
   income is derived from:                      at and sell for higher multiples.            an equity/asset ratio of around 8
     Revenues consisting of (a) interest     3. Capitalization is a bank’’s tangible         percent——normal for most banks.
     income on loans and investments,           equity capital (equal to stockholders’’      The incremental funding would
     minus interest expense on deposits         equity less goodwill and intangibles).       be provided by growth in deposits
     and borrowings; and (b) fee income         Profitability and valuation metrics          (which are liabilities on the bank’’s
     from the sale of financial services        can be influenced by the degree              balance sheet).
     Less: provision expense for expect-        of under- or over-capitalization.
     ed loan losses (similar to a bad debt      Tangible equity capital, which is               Good stewards of capital aim to
     expense in a non-financial firm)           usually considered the foundation          strike a balance between having a big
     Less: operating expenses (with             of the valuation building block, is        enough cushion for safety and sound-
     personnel expenses typically ac-           significantly influenced by regulatory     ness (from a durability perspective),
     counting for the bulk of them)             minimum guidelines (as a percentage        managing with a return on equity
     Less: income tax expense                   of tangible assets), regulatory            mindset, and protecting against share-
                                                expectations (above the guidelines),       holder dilution.
   Banks that show the ability to               investor expectations, board                    Other important drivers of value
   generate higher earnings growth              expectations, historical operating         include:
   rates tend to support higher                 and financial results, the level of risk   •• Asset quality——in loan underwriting,
   valuation multiples.                         inherent in a particular bank’’s loan         ongoing monitoring, and problem-
2. Core Deposits represent the mix              and investment portfolios and, of             loan resolution. Banks with pristine
   of stable, low-cost deposit funding          course, management’’s point of view.          asset quality tend to be more
   that differentiates banks from other         Because of the liquid and financial           profitable and enjoy higher valuation
                                                                                           •• Quality of management, which
  Chart 1: Cumulative Annual Performance, December 1987 through March 2009                    includes a strong risk management
                                                                                              orientation, a positive reputation
                                                                                              with regulators, and well developed
                                                                                              board governance practices.
                                                                                           •• Efficient operations, including smart
                                                                                              utilization of outsourcing.
                                                                                           •• Geography, i.e., local markets.
                                                                                              Banks located in metropolitan
                                                                                              statistical areas (MSAs) that have
                                                                                              a combination of market density
                                                                                              and growth elements often enjoy
                                                                                              higher multiples. Banks located in
                                                                                              rural or no-growth markets tend to
                                                                                              have lower multiples when it comes
                                                                                              to publicly held stock prices and
                                                                                              takeout pricing.

                                                                                           Traditional Bank Valuation
  Price change for SNL Bank Index, S&P 500, and NASDAQ Market (December 1987                    Bank valuation practitioners typi-
  Index = 100)
                                                                                           cally use five main methodologies, with

20                                                                                 The Value Examiner            May/June 2009
                                                 A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES

various weightings applied to each. The        be either a markup or a markdown of         •• Price to earnings ratio
standard of value (fair value, fair market     the book value of loans. The loan loss      •• Price to book ratio
value, intrinsic value, etc.), the level of    reserve is adjusted if the expected loan    •• Price to tangible book value ratio
value (control, marketable minority, non-      losses are materially different from           (book value less goodwill and other
marketable minority interest), and the         what can be absorbed in the reserve.           intangibles)
purpose of the valuation are important         Premises and equipment are adjusted
factors, as well. The five main methodol-      to estimated fair market values. The li-    Guideline Transactions for
ogies are discounted cash flow, net asset      ability for time deposits is valued using   Sale of Control
value, guidelines transaction for minor-       the same national market methodology            This approach is based on observ-
ity share trading, guideline transactions      mentioned above for loans.                  ing recent and historical M&A trading
for sale of control, and market price.              Core deposits consist of the rela-     multiples for similarly situated banks.
                                               tively stable non-interest-bearing de-      These values usually reflect control
Discounted Cash Flow                           mand deposits, interest-bearing check-      premiums, which may have to be esti-
     This approach takes annual earn-          ing deposits, savings accounts, and         mated and accounted for, in order to
ings or free cash flow forecasted over a       money market accounts. The net asset        compare with other methodologies.
projection period (typically five years).      value (NAV) methodology for valuing         M&A multiples for banks typically are
Because of the forward-looking nature          core deposits consists of calculating       expressed in terms of:
of this method, it is best used in a going-    a net earnings stream for each core         •• Price to earnings ratio
concern context. A target capital ratio is     deposit type, then calculating the net      •• Price to book value
used to ensure normalized capitalization,      present values of those streams using       •• Price to tangible book value
in order to reduce the distorting effects of   a depletion schedule (using sum-of-         •• Premium as a percentage over core
under- or over-capitalization. Dividends,      the-years digits) for the expected lives       deposits (price less tangible book
stock repurchases, stock issuances, and        of those account types. Often, that            value, divided by total core deposits
the exercise of stock options are also fac-    core deposit value is one of the largest       [which are total deposits less jumbo
tored into the analysis. The periodic flows    markups to stated book value.                  CDs and brokered deposits])
are discounted back to the present based            The market values for short- and
on an assumed cost of capital discount
                                               long-term debt and other non-deposit        Market Price
rate (typically based on the capital asset
                                               liabilities are also derived. NAV is de-        This approach is based on ob-
pricing model). Then a residual value is
                                               termined by starting with stated book       serving recent and historical trading
calculated based on either (a) capitaliza-
                                               value of equity, deducting goodwill         patterns (if public) or observed arms-
tion of fifth-year earnings, or (b) a mod-
                                               and intangibles, and then adding the        length stock trades (if private). Market
eled sale of the bank earnings or book
                                               cumulative adjustments for the line         price data points can also be observed
value multiples applied at the end of the
                                               items in both assets and liabilities.       in recent stock issuances and/or buy-
fifth year. That residual value is also dis-
counted back to the present. The present                                                   backs. The derived market price for the
values are aggregated into a net present       Guideline Transactions for                  valuation is expressed in terms of:
value-per-share calculation.                   Minority Share Trading                      •• Price to earnings
                                                    This approach is based on observ-      •• Price to book value
Net Asset Value                                ing recent and historical trading mul-      •• Price to tangible book value
     This method makes market adjust-          tiples for publicly traded peer groups      •• Premium as a percentage over core
ments to the accounting-based book             of banks. Peer groups are often defined        deposits
values of balance sheet assets and li-         by size and growth rates of bank assets,
abilities. It is designed to provide a         geography, profitability, capitalization,   Before and After
current snapshot and, as such, is used         asset quality, and business mix. Public-         Let’’s look at the characteristics of
in a liquidation context when there is         ly traded prices are usually consistent     small and medium-size bank valuations
no going concern. For the most part,           with a marketable, minority-interest        for the period leading up to 2008, ver-
bank securities portfolios were marked         valuation level. Consequently, if the       sus those in 2008 and thus far in 2009.
to market regularly and fairly easily.         bank is privately held, these values             Prior to 2008: This environment
The loan cash flows (principal and in-         may need to be adjusted downward for        was characterized by a healthy economy,
terest) are discounted using the cur-          a marketability discount. Trading mul-      clean asset quality, strong asset growth,
rent national loan rates observed at the       tiples for banks typically are expressed    relatively strong net interest margins and
time of the valuation. The result would        in terms of:                                profitability, high trading multiples (i.e.,

May/June 2009             The Value Examiner                                                                                        21

200 to 250 percent of book), coupled           The DCF analysis, which relied on       to tangible book multiple) plus some-
with high takeout multiples (250 to 300    that valuator’’s forecast assumptions for   thing for its core deposits. Even the
percent of book). This was an era in       growth and profitability and the selec-     weakest banks often sold for 120 to 140
which discounted cash flow (DCF)           tion of a discount rate determined by       percent of tangible book value.
and NAV typically produced the lowest      the valuation, often produced valua-             2008-2009: The tide for the econo-
valuation results, while publicly traded   tion results way below the comparables      my, and for banks in particular, started
comps and sale-of-control comps pro-       from minority share trading and sale        to turn very negative in the third quar-
duced materially higher valuation          of control comps (even after adjusting      ter of 2007. From that point until now,
amounts. This period was ripe with         for control premiums). The discount         the environment has been character-
industry consolidation, with the num-      rates (based on the capital asset pric-     ized by a severely troubled economy,
ber of banks falling by half over the      ing model) used were typically around       rapid and deep deterioration of asset
previous 20 to 25 years. Consequently,     15 percent, with risk-free rates in the 6   quality, a scramble for liquidity, dys-
many publicly traded banks had valu-       to 7 percent range, market premiums         functional capital markets, declining
ations that reflected some expectation     of 5 to 6 percent, and only a couple        asset (collateral) values, falling stock
for M&A built into the trading prices.     percentage points accounted for in the      prices, Fed easing, concerns about
(See Charts 2a, below, and 2b, page 23,    Beta or in company-specific factors.        survivability, and consumer concerns
for publicly traded bank pricing trends,       The NAV methodology was not             over the safety of their deposits. Con-
segmented by asset size.)                  deemed to be an important or partic-        sequently, NAV has emerged as the de
     M&A takeout multiples reached         ularly relevant approach at the time,       facto methodology, because of severely
lofty levels. Healthy stock prices for     because of the big disconnect between       diminished (or no) earnings streams
                                                                                       to value, for the last four quarters and
many acquirers also facilitated their      NAV and other valuation approaches.
                                                                                       prospectively. Presently, in valuing
ability to pay higher prices, especially   NAV was viewed more as a liquidation
                                                                                       small and medium-size banks, inves-
when they used their stock as currency     value, relevant only when asset quality
                                                                                       tors are not giving much weight to fu-
for the acquisition of smaller banks or    was severely compromised and going-
                                                                                       ture earnings and core deposits, due to
those with lower relative valuations.      concern was a legitimate question.
                                                                                       the lack of visibility and confidence in
(See Charts 3a through 3c, pages 24-25,        In the worst-case scenario, a bank
                                                                                       finding the bottom of asset quality de-
for M&A pricing trends for target banks    was ultimately viewed as worth its tan-
with assets less than $500 million.)       gible book value (at 100 percent price
                                                                                            Today bank executives have to de-
                                                                                       fend their tangible book values, based
  Chart 2a: SNL Bank Indices, December 2000 through March 2009: Price/LTM EPS          on the magnitude of problem (non-ac-
  (X) Performance.                                                                     crual) loans, other real estate owned,
                                                                                       fresh delinquencies (31 to 89 days past
                                                                                       due) that turn into problem loans, ad-
                                                                                       ditional operating losses, and impaired
                                                                                       investments in the securities portfolio.
                                                                                       Bank mergers and acquisitions are vir-
                                                                                       tually non-existent, so bank stocks no
                                                                                       longer trade with any M&A premium.
                                                                                       As a result, there have been more dis-
                                                                                       cussions today involving so-called
                                                                                       mergers of equals, which typically
                                                                                       transact at little or no premium. While
                                                                                       merger discussions are occurring, with
                                                                                       capital scarce and many markets in
                                                                                       decline, very few whole-bank merger
                                                                                       transactions have been consummated,
                                                                                       as due diligence and reverse-diligence
                                                                                       of the loan portfolios put management
                                                                                       teams and boards in an uncomfortable
                                                                                       position of having to advocate for the
                                                                                       merger and to take on the counterparty’’s

22                                                                             The Value Examiner            May/June 2009
                                               A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES

credit risk. FDIC-assisted transactions                                                 ately convertible into additional pre-
                                             ket impairments in the investment port-
that facilitate relatively seamless trans-                                              ferred stock (for privately held banks).
                                             folio, mainly in the larger banks. Bank
fers from bad banks to good banks are                                                   The preferred dividends, while at a
                                             stock prices had been heading south
on the rise.                                                                            relatively attractive after-tax cost of
                                             all year. Against this backdrop, private
     For the first time since the late                                                  5 percent per annum for the first five
                                             equity capital was starting to line up
1980s and early 1990s, DCF valua-                                                       years (excluding the effects of the war-
                                             in response to the coming needs. Late
tions are now running higher than                                                       rants) are, nonetheless, additional cash
                                             in the third quarter, conditions wors-
most of the other methodologies. For                                                    flow burdens at a time when earnings,
                                             ened——hastened by the government
the DCF methodology, discount rates                                                     cash flows, liquidity, and capital are all
                                             takeover of AIG, the demise of Lehm-
are averaging 11 to 14 percent for bank                                                 stressed. New TARP capital deploy-
                                             an Brothers, and the continued decline
valuations, and the composition has                                                     ments may take the form of convert-
                                             in real estate values.
changed. For example, today the risk                                                    ible preferred, with more potential di-
                                                  In September, the U.S. Treasury
free rate (10-year Treasury) is approxi-                                                lution. All forms of TARP capital rank
                                             and Federal Reserve announced the
mately 3 percent. Add to that a market                                                  senior to common shareholders (who
                                             TARP plan to provide Tier 1 capital
risk premium of 5 to 6 percent, and a                                                   continue to take ““first dollar”” loss risk)
                                             to ““healthy”” banks. Virtually all pri-
3 to 7 percent premium for Beta and                                                     and are on the same level of senior-
                                             vate equity capital raising immediately
company-specific risk factors.                                                          ity as other preferred shareholders.
                                             came to a halt. The nine largest banks
                                                                                        TARP preferred ranks junior to trust
                                             were called to Washington, DC, and
TARP: Implications on                                                                   preferred securities (which are junior
                                             were told by Fed Chairman Bernanke
Common Shareholder Value                                                                subordinated debentures that pay tax-
                                             and then-Treasury Secretary Paulson
                                                                                        deductible interest, but are treated as
     Once the second quarter 2008 fi-        to take initial allocations as a show of
                                                                                        qualifying Tier 1 capital for regulatory
nancials for both publicly held and          solidarity and ““endorsement”” of the
                                                                                        purposes) and to subordinated debt
privately owned banks were available         plan.
                                                                                        and senior debt.
for analysis, the first evidence emerged          TARP capital that has been de-
                                                                                             With the potential dilution and po-
of capital pressures building in banks,      ployed to date has been in the form of
                                                                                        liticization risk for TARP capital tak-
both large and small. Banks showed           preferred stock, either with warrants
                                                                                        ers, the banks should view TARP capi-
substantial earnings declines, deterio-      convertible to common (for publicly
                                                                                        tal as a bridge loan to give themselves
rating asset quality, and mark-to-mar-       held banks) or with warrants immedi-
                                                                                        the time and resources to weather the
                                                                                        storm. TARP capital should be refi-
  Chart 2b: SNL Bank Indices, December 2000 through March 2009: Price/Tangible          nanced with private sources as soon as
  Book Value (%) Performance.                                                           feasible, which will be predicated on
                                                                                        the broader assembling of capital for
                                                                                        injecting in banks, and, of course, the
                                                                                        particular bank’’s circumstances, per-
                                                                                        formance, and prospects.

                                                                                        Implications for Bank
                                                                                             For the foreseeable future, TARP
                                                                                        capital is the only source of equity
                                                                                        funding. Because of the presence of
                                                                                        TARP, along with other preferred and
                                                                                        convertible preferred instruments on
                                                                                        the balance sheet, the investor com-
                                                                                        munity has started to focus more on
                                                                                        the level of ““tangible common equity,””
                                                                                        and as a percentage of tangible assets
                                                                                        (or risk-weighted assets). TCE/TA is
                                                                                        now becoming the measure of choice
                                                                                        for capital adequacy among investors
                                                                                        and regulators.

May/June 2009           The Value Examiner                                                                                      23

    There has been a lot of belly-            The question of what constitutes           since it is the regulatory capital haircut
aching by banks, bank investors, and      other-than-temporary impairments (OT-          that is front and center for most banks
analysts about the distorting effects     TIs), which have the effect of decreasing      today. In early April, the FASB approved
of FAS 157, particular as it has been     a bank’’s capital levels, has been mostly      an amendment to FAS 157 that follows
applied to difficult-to-value private     a large-bank phenomenon, until now.            Buffett’’s suggestion. The new guidance
label collateralized mortgage obliga-     Berkshire Hathaway chairman Warren             addresses how companies account for
tions, trust preferred collateralized     Buffett recently suggested that mark-          assets whose market value has fallen
debt obligation (CDO) tranches, and       to-market accounting be suspended for          below the reported balance sheet value,
other structured finance securities in    banks for regulatory capital purposes, while   but it does not change the fair value ac-
bank portfolios.                          keeping it in place for GAAP purposes,         counting treatment. Banks can split off
                                                                                         that portion of the mark-to-market loss
                                                                                         that constitutes ““credit loss”” (attributed
 Chart 3a: Completed Bank and Thrift M&A Transactions Announced, January                 to bad debt or declining cash flow funda-
 2000 through March 2009: Showing number of deals and aggregate deal value               mentals of the instrument) and take an
 ($ million) for sellers with total assets < $5 billion as of announcement date.         OTTI hit to earnings and capital. The re-
                                                                                         maining portion of the mark-to-market
                                                                                         loss is called ““noncredit loss”” attributed
                                                                                         to other conditions, such as liquidity and
                                                                                         the uncertainty associated with the gov-
                                                                                         ernment bailout plans and changes in
                                                                                         interest rates. The banks can book non-
                                                                                         credit losses into other comprehensive
                                                                                         income on the balance sheet, thereby not
                                                                                         flowing through the income statement or
                                                                                         impacting regulatory capital.
                                                                                              A continuing deterioration of as-
                                                                                         set quality will put pressure on tangible
                                                                                         book (and tangible common equity)
                                                                                         value. A bank’’s capital and its loan loss
                                                                                         reserve are the only protections against
                                                                                         loan losses and securities write-downs.
                                                                                              With all of the noise created by
                                                                                         mark to market, asset quality, and
 Chart 3b: Completed Bank and Thrift M&A Transactions Announced, January                 TARP, more attention will need to
 2000 through March 2009: Showing average deal value/tangible book value (%)
                                                                                         be paid to banks’’ core earnings pow-
 for sellers with total assets < $5 billion as of announcement date.
                                                                                         er——defined as pre-tax, pre-provision
                                                                                         (for loan losses) earnings, minus the
                                                                                         pre-tax effect of preferred dividends.
                                                                                         Stronger banks will need to show core
                                                                                         earning power coverage of potential
                                                                                         loan losses by at least, say, 3 percent of
                                                                                         average loans.
                                                                                              Fewer M&A transactions in the re-
                                                                                         cent pricing compression era will make
                                                                                         peer-group M&A data selection difficult.
                                                                                         Furthermore, if more M&A deals occur
                                                                                         in the form of mergers-of-equals, to be
                                                                                         completed at prices closer to tangible
                                                                                         book, the downward pressure on M&A
                                                                                         comps will continue.
                                                                                              Increased bank failures are going
                                                                                         to have an impact on the appropriate

24                                                                               The Value Examiner              May/June 2009
                                                A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES

discount rate for DCF valuations. That        earnings growth, aided by cost sav-            where value lies in a bank; this would
should be reflected in either higher Be-      ings, and the core deposit pickup are          be in its cash flow and deposits.””
tas or company-specific risk premiums.        sustainable and worthwhile in light of
                                              the target bank’’s current and prospec-            Amen to that!       VE
Triggering a Return to                        tive risk profile and integration risk.
Fundamentals                                       Current M&A pricing for the
     Investors should see at least two        relatively few transactions being com-         Scott McCallum, MBA, is a senior manager
consecutive quarters of demonstrated          pleted is around tangible book value——                          with Cendrowski Cor-
stabilized core earnings power by banks,      somewhat higher for clean and prof-                             porate Advisors (www.
as well as some evidence of stabilizing       itable targets, and around 50 percent                           cca-advisors.com), a con-
asset quality, in order for bank valua-       of tangible book for banks reporting                            sulting firm concentrat-
tions to start thawing. The Financial         modest losses and with peer-average                             ing in litigation support,
Stability Plan, announced by Treasury         asset quality measures. M&A pric-                               business valuation, fraud
Secretary Geithner in February, called        ing will not firm up until the broader                          deterrence, operational as-
for establishing the Public-Private In-       economy show signs of stability, suit-                          sessments, and back-office
vestment Fund to facilitate the move-                                                                         operations. He has nearly
                                              ors get access to capital markets (other
ment of toxic ““legacy”” assets off the                                                                       30 years of experience in
                                              than the U.S. government), and the
                                                                                             the banking and private equity industries.
books of banks and into this quasi-pub-       risk/reward quotient becomes more
lic fund. While this program could help       suitor-friendly.
larger banks or those with an abundance            As for that new notion of ““tangible
of toxic assets, the prices offered by the    common equity,”” Dick Bove, a bank-
PPIF may not be high enough rela-             ing analyst at Rochdale Securities, in
tive to the DCF values calculated by          a commentary dated March 18, 2009,
banks, should they continue to hold           concluded that the use of tangible com-
onto those assets.                            mon equity ““is not helpful in determin-
     Net interest income, the lifeblood       ing which healthy bank is better run””
revenue for most banks, is a function of      and ““is of no help in determining what
earning asset mix and growth, and net         a bank’’s value is at time of liquidation.””
interest margin. While the prospects          He went on to say, ““It is time for inves-
for balance sheet growth are limited in       tors and policymakers to drop the fad
the near term, given the poor econom-         of the moment and re-concentrate on
ic conditions, the net interest margin
environment is improving, thanks to
such factors as                                Chart 3c: Completed Bank and Thrift M&A Transactions Announced, January
•• The positive yield curve                    2000 Through March 2009: Showing average deal value/earnings (X) for sellers
                                               with total assets < $5 billion as of announcement date.
•• The use of floors in floating rate
•• Higher loan yields (relative to risk)
•• An ample re-intermediation
   opportunity (out of mutual funds
   and money market funds, back into
   bank deposits)
•• Lower deposit costs

     Getting bank M&A on track again
will require a dose of John Maynard
Keynes’’s notion of ““animal spirits””; and
a shot of increased confidence by suit-
ors that (a) the asset quality at the tar-
get banks is stabilizing, (b) the suitors’’
shares reflect stronger multiples, and
(c) the tangible benefits of incremental

May/June 2009            The Value Examiner                                                                                           25

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