Category: KPMG

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Size & Scale: The King and Queen of Bank M&A?

Earlier this week, I shared my perspectives on bank M&A with the Wall Street Journal.  What follows builds off the piece that ran in Tuesday’s print edition, highlighting key findings from Bank Director’s annual Bank M&A Survey.

By Al Dominick // @aldominick

At a time when J.P. Morgan is getting smaller, the pressure is on for smaller banks to get bigger.  As KPMG recently shared with BankDirector.com, there was a 25% increase in bank deals in the U.S. in 2014, compared to 2013, and there is a good possibility that the number of deals in 2015 will exceed that of 2014.  One reason for this: a larger institution can spread costs (such as investments and regulatory burdens) across a larger customer and revenue base.

Not surprisingly, 67% of executives and board members responding to Bank Director’s 2016 Bank M&A Survey say they see a need to gain more scale if they are going to be able to survive in a highly competitive industry going forward.  As our director of research, Emily McCormick, shared, “many of these respondents (62%) also see a more favorable climate for bank deals, hinting at a more active market for 2016 as banks seek size and scale through strategies that combine organic growth with the acquisitions of smaller banks.”

While the majority of bank executives and boards surveyed feel a need to grow, respondents don’t agree on the size banks need to be in order to compete today.  A slim majority, 32%, identified $1 billion in assets as the right size… interesting, but not surprising, when you consider that 89% of commercial banks and savings institutions are under $1 billion in assets, according to the FDIC (*personally, I’m of the opinion that $5Bn is the new $1Bn, but that’s a topic for another day).  On to the key findings from this year’s research:

  • Two-thirds report their bank intends to participate in some sort of acquisition over the next 12 months, whether it’s a healthy bank (51%), a branch (20%), a nondepository line of business (14%), a loan portfolio (6%) and/or a financial technology firm (a scant 2%).
  • Respondents indicate that credit culture, at 32%, and retaining key talent that aligns with the buyer’s culture, at 31%, are the most difficult aspects of the post-merger integration process.
  • More institutions are using social media channels to communicate with customers after the close of the deal. 55% of respondents who purchased a bank in 2014 or 2015 used social media, compared to 42% of 2011-2013 deals and just 14% of 2008-2010 deals (*FWIW, Facebook, at 26%, is the most popular channel for respondents).
  • Fifty-six percent of respondents have walked away from a deal in the past three years.  Of the respondents who indicate they declined to buy, 60% cite deal price while 46% blame the credit quality of the target institution.
  • Why do banks sell? Of the executives and board members associated with banks sold from 2012 to 2015, 55% say they sold because shareholders wanted to cash out.  Despite concerns that regulatory costs are causing banks to sell, just 27% cite this burden as a primary motivator.

The full survey results are now available online at BankDirector.com, and will be featured in the 1st quarter, 2016 issue of Bank Director magazine.  In addition, for those executives interested in connecting with many of the key decision makers driving the deals mentioned above, our annual Acquire or Be Acquired Conference will be held at the Arizona Biltmore from January 31 through February 2.

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Our 2016 Bank M&A Survey, sponsored by Crowe Horwath LLP, examines current attitudes and challenges regarding bank M&A, and what drives banks to buy and sell. The survey was completed in September 2015 by 260 chief executive officers, independent directors and senior executives of U.S. banks, and former executives and directors of banks that have been acquired from 2012-2015.

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Risk Management: Most Certainly An Ongoing Process

Next week, Bank Director releases its annual Risk Practices Survey.  In advance of that report, let me share an excerpt from a risk management-focused piece by KPMG’s Lynn McKenzie and Edmund Green — How a Board Can Credibly Challenge Management on Risk — that foreshadows some of the results. 

As our industry evolves, banks increasingly rely on complex models to support economic, financial and compliance decision-making processes. Considering the full board of a bank is ultimately responsible for understanding an institution’s key risks — and credibly challenging management’s assessment and response to those risks — let me share the eight considerations that KPMG wrote about for board members as they evaluate their risk oversight.

(1) Do our board members (particularly directors on audit or risk committees) know our bank’s top enterprise risks — those that threaten our bank’s strategy, business model, or existence?

(2) Does our bank have a formal risk management process? Do directors know how management identifies and manages risks, both existing and emerging, and if there is a process of accountability? Does the board have comfort that management has the proper talent to manage today’s risks?

(3) Does the bank have a formal risk appetite statement? If not, how does the board oversee that management is not taking risks outside of the bank’s stated risk tolerance? Is there a protocol to escalate a risk issue directly to the board? Is there evidence that management recognizes the critical need to timely communicate risk issues to board members? Is there a process for the board to evaluate the impact of compensation on management’s risk-taking?

(4) As the bank takes on new initiatives or offers new products and services, does the board understand the process to evaluate the risks prior to decisions being made? Is there a clear threshold for when items need to be brought to the board before finalizing a decision?

(5) In examining management’s reporting process, are directors concerned whether they are getting relevant data? Are they getting so much detail that it cannot be absorbed? Are they getting data at such a high level that it’s impossible to evaluate risk?

(6) Does the board recognize that risk management done well adds competitive advantage and value by addressing gaps in operations? Viewing risk management solely as a compliance function increases the chances of wasting time and money.

(7) Is the board ensuring that, in dealing with the regulators, the bank is “getting credit’’ for the risk management activities it is doing well by being able to describe the programs that have been instituted—or actions taken—that will enable the bank to “harvest value” from its enterprise risk management process?

(8) Finally, given the importance of “tone at the top,’’ are directors satisfied that the proper culture of “doing the right thing’’ exists across the organization?

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As many know by now, the 2,300+ page Dodd-Frank Act requires publicly traded banks with more than $10 billion in assets to establish separate risk committees of the board, and banks over $50 billion to additionally hire chief risk officers.  Not surprisingly, many institutions under these thresholds have similarly established committees and recruited executives into their bank.

By taking a more comprehensive approach to risk management, I continue to see institutions reap the benefits with improved financial performance… and yes, this too foreshadows next week’s research report.  To view the entire KPMG article, here is the link (don’t worry, no registration required).  I’ll post more about the Risk Practices Survey along with a link to both the full results and summary report here next week.