Before I head out to California to speak at Moss Adams’ annual Community Banking conference, a look at the principal growth strategy for banks: mergers and acquisitions.
Over the last few years, bank advisers have made the case that consolidation should increase due to significant regulatory burdens, lack of growth in existing markets and aging boards and management teams that are “fatigued” and ready to exit our industry. So as I see prices to acquire a bank on the rise, it is interesting to note that demand for a deal hasn’t slowed. According to Raymond James, there were 136 acquisitions announced in the 1st half of the year versus 115 announced in the first half of 2013. Moreover, total deal value is reported at $6.1 billion versus $4.6 billion in the first half of 2013.
Taking this a step further… While activity in the first quarter of 2014 was only slightly ahead of prior years, the second quarter saw a dramatic increase — 74 deals were announced, which is the highest of any quarter since the credit crisis of 2008. According to this piece by Crowe Horwath (Will 2014 Be the Year of M&A?), annualized, the total number of announced transactions will exceed 260, which is on par with many of the pre-crisis years of the 2000s.
When is a “Deal Done Right?”
As competition to acquire attractive banks increases, so too does the short and long-term risks incurred by the board of an acquiring institution to find the right fits. In many ways, the answer to “what makes a good buy” depends on the acquiring board’s intent. For those looking to consolidate operations, efficiencies should provide immediate benefit and remain sustainable over time. If the transaction dilutes tangible book value, investors expect that earn back within three to five years. However, some boards may want to transform their business (for instance, a private bank selling to a public bank) and those boards should consider more than just the immediate liquidity afforded shareholders and consider certain cultural issues that might swing a deal from OK to excellent.
My Thoughts on CIT’s Acquisition of OneWest
No two deals are alike — and as the structure of certain deals becomes more complex, bank executives and boards need to prepare for the unexpected. The sharply increased cost of regulatory compliance might lead some to seek a buyer; others will respond by trying to get bigger through acquisitions so they can spread the costs over a wider base. So as I consider this summer’s CIT deal for OneWest, I see a real shift happening in the environment for M&A. I see larger regional banks becoming more active in traditional bank M&A following successful rounds of regulatory stress testing and capital reviews. Also, it appears that buyers are increasingly eyeing deposits, not just assets. This may be to prepare for an increase in loan demand and a need to position themselves for rising interest rates.
A “Delay of Game” Warning
While M&A activity levels are picking up in the bank space, the amount of time from announcement of acquisition to the closing of the deal has widened significantly in some cases. As noted by Raymond James earlier this week, “this has been particularly notable for acquirers with assets greater than $10 billion where there have been notable delays in several instances given the greater regulatory scrutiny for banks above this threshold. M&T’s pending acquisition of Hudson City was originally expected to close in 2Q13, and through August 18, 2014, was 722 days from the original announcement on August 27, 2012. This case stands out as a prime example of issues surrounding Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance. A more recent example is the delay in the expected closing of BancorpSouth’s two pending acquisitions (Ouachita Bancshares and Central Community Corporation) that have both been pushed out due to similar issues.”
When it comes to bank M&A, I sometimes feel like everyone has an opinion. I’d be interested in your thoughts and welcome your feedback. To leave a comment on this post, simply click on the white plus sign (within the grey circle at the bottom of this page). I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me too.