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Bank Strategy Briefing

Bank Strategy Briefing: M&A book value multiples

October 29, 2018

One common question we get from community bankers is: What are banks selling for these days? Most of the time the person asking the question is looking for some multiple of tangible book value. This “Price/TBV” multiple is a seemingly simple metric that many in the industry use to identify pricing trends on a macro-level. Here are the current trends on this data:

Graph of US Bank Deal

There is a tendency in the industry for some institutions to casually use Price/TBV multiples as a benchmark to gauge whether a particular seller received an attractive premium or whether a particular buyer struck a good deal on an acquisition. The problem is that Price/TBV data can be a misleading metric. This is because reported Price/TBV multiples are often applied in a non-uniform manner based on deal structure and the amount of tangible equity on a particular seller’s balance sheet. Those relying on Price/TBV as an apples-to-apples comparison of deal valuations run the risk of being misled by these nuances. This can lead to unrealistic expectations when exploring M&A opportunities on both the buy-and sell-side. 

To illustrate this point, consider the following (overly simplistic) illustrations of three identical banks that each sell for a 1.50x Price/TBV multiple, yet deliver significantly different purchase prices to their shareholders:

Transaction #1 Transaction #2 Transaction #3
Total Capital Example Core Capital Example Accrued Expense Example
Buyer pays 1.50x multiple on total tangible equity. Buyer pays 1.50x multiple on 8% “core” tangible equity. Excess capital paid out on dollar-for-dollar basis. Buyer pays 1.50x total tangible equity after seller accrues for core processor early termination and deconversion charges.
Total Assets: 
$100 million
Total Assets: 
$100 million
Total Assets: 
$100 million
Tangible Equity: 
$11 million
Tangible Equity: 
$11 million
Tangible Equity:
$11 million
    Accrual for $1.5 million core processor charges immediately prior to closing.
  “Core” Equity: $8 million Adjusted Tangible Equity: $9.5 million
Multiple: 1.50x Multiple: 1.50x Multiple: 1.50x
  Core Equity Price: $12 million  
  Add Excess Capital: 
$3 million
Purchase Price: 
$16.5 million
Purchase Price: 
$15 million
Purchase Price: 
$14.25 million


Here are a few takeaways that we think are helpful:

  1. Deal valuations are nuanced and institution specific. Be skeptical of conclusions drawn based largely on reported or rumored Price/TBV multiples.
  2. There are many factors beyond Price/TBV that inform proper bank valuations including Price/earnings, comparable transactions, expected cost savings and earn-back period. 
  3. Do not pursue or abandon an M&A strategy based on what you believe to be “market pricing”, unless you have done your homework.  
  4. Speak with a good investment banker, attorney, accountant or other trusted advisor who can educate you on market-specific valuation information or connect you with the right expert.  

Of course, our Financial Institutions team at Godfrey & Kahn, S.C. is always here to assist either directly or by connecting your bank with other helpful resources.

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