Category: Merger & Acquisitions

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Before I pack my bags

DC food trucks got some business...
By staying local, a few DC food trucks picked up extra business this week…

For the first time in nearly two months, I did not leave the friendly confines of Washington, D.C. for work.  Next week, AA gets my business back with a trip to San Francisco — followed by one the following week to Chicago and the next, to New York and Nashville.  Yes, I anticipate sharing a number of stories in the weeks ahead, but these three had me excited to post today.  As always, my #FridayFollow-inspired post on things I heard, learned or discussed that relate to financial organizations.

(1) File this one under “things that make you go hmmm.”  Earlier this week, the American Banker published an interesting piece entitled “Fed Reveals Secret Lessons of Successful Small Banks.”  As I’ve written in multiple M&A-focused posts, many investment banks  predicted a wave of consolidation among community banks after the financial crisis hit while positing that financial institutions need at least $1 billion of assets to compete/remain relevant.  This piece, however, cites recent St. Louis Fed research that shows the asset range with the most “thrivers” — the term the StL Fed used to describe remarkable banks — was $100 million to $300 million.  As the American Banker notes, much of the research stemming from the crisis focused on the mistakes banks had made, so the St. Louis Fed decided to take the opposite approach.  If you have a subscription to AB, their recap is worth a read.

(2) Disruptive technologies were front & center a few weeks ago in New Orleans at our annual Growth Conference.  Yesterday afternoon, McKinsey put out “Disruptive technologies: Advances that will transform life, business, and the global economy.”  While not specific to our industry, the fact that the “mobile internet” placed first should reinforce the conversations taking place in bank boardrooms today.  According to the authors, 4.3 billion people are yet to be connected to the Internet, with many expected to first engage through mobile devices.  Considering the six-fold growth in sales of smartphones and tablets since launch of iPhone in 2007, well, you can see why I’m bullish on banks getting social and enhancing their mobile offerings ASAP.

(3) Finally, for those quants looking for a good, non-Krugman economics piece, look no further than the NY Times’s “Economix” blog.  The most recent post: How a Big-Bank Failure Could Unfold.  In the piece, the authors consider what could happen if there were a hypothetical problem at a major international financial conglomerate such as Deutsche Bank or Citigroup.  As they note, “defenders of big banks are adamant that we have fixed the problem of too big to fail.”  This entry considers the alternative.  So for those with a desire to stay up late during this Memorial Day three-day weekend?  This might be a read for you.

Aloha Friday!

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Standing Out on a Friday

Fenway Park's red seatComing off of last week’s Growth Conference, I found myself planning for next year’s program. As we recognized Customers Bank, State Bank & Trust and Cole Taylor Bank for “winning” our annual Growth rankings, I spent some extra time looking at other banks that performed exceptionally well this past year. So today’s Friday-follow inspired post shares a few thoughts and conversations I’ve had about three very successful banks.

(1) While easy to frame the dynamics of our industry in terms of asset size, competing for business today is more of a “smart vs. not-so-smart” story than a “big vs. small.” During one of my favorite sessions last week — David AND Goliath — Peter Benoist, the president and CEO of St. Louis-based Enterprise Financial Services Corp, reminded his peers that as more banks put their liquidity to work, fierce competition puts pressures on rates and elevates risk. My biggest takeaway from his presentation: we all talk about scale and net interest margins… but it’s clear that you need growth today regardless of who you are. It is growth for the sake of existence.

(2) During the afore mentioned presentation, the participants all agreed that you cannot compete with BofA on price. Consequently, the ability to introduce new products (e.g. increasing deposit platforms) is key for many banks today. So from diversification to differentiation, let me turn my attention to San Francisco-based First Republic. Their story is a fascinating one. While not with us in New Orleans, I heard a lot about them yesterday while I was in NYC visiting with KBW. Subsequently, our editor wrote me with some background: Jim Herbert founded the bank in 1985, sold it to Merrill in 2007 for 360% of book, took it private through a management-led buyout in July 2010 after Merrill was acquired by Bank of America, then took it public again in December through an IPO. First Republic is a great bank: it finished 3rd out of 80+ in the $5-$50 billion category in Bank Director magazine’s 2012 performance rankings. But not only is it solely focused on organic growth, it’s also focused solely on private banking.

(3) Finally, as we move our attention from growth to risk in advance of our annual Bank Audit Committee conference, I started to think about the challenges facing banks of all sizes. Admittedly, I started with Fifth Third as their Vice Chairman & CEO will be joining us in Chicago as our keynote speaker. Yes, I am very interested to hear his perspectives on the future of banking. Quite a few small bank deals have recently been announced, and I have to believe many sales came together thanks to escalating compliance costs and seemingly endless regulation. For larger institutions like Fifth Third, it will be interesting to see what transpires over the next few years and where he thinks the market is moving for banks of all sizes. If you’re interested, take a look at our plans for this year’s event.

Aloha Friday!

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About today’s picture:

I’m a die-hard Boston RedSox fan, and for anyone whose been early to, or stayed late at, Fenway Park, you’ve probably seen one red seat in the right field bleachers (Section 42, Row 37, Seat 21). Did you know it signifies the longest home run ever hit at Fenway, one struck by the great Ted Williams on June 9, 1946? While a nice chance for me to share my love for the RedSox, I thought the visual made a lot of sense when writing about standing out from the crowd… -AD

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Its Aloha Friday

Cherry blossoms in DC
An example of organic growth in Chevy Chase D.C.

Earlier this week, as part of Bank Director’s annual Bank Chairman/CEO Peer Exchange, I was lucky enough to spend time with key leaders from 40+ community banks averaging nearly $900M in asset size. As I reflect on various growth-focused conversations I had with CEOs of NASDAQ-listed banks, I think I’ve found a common thread. Each person runs an institution profitable enough to make acquisitions — all while maintaining adequate capital ratios.  The interesting part (for me at least) concerns the strategies these executives set to build their brand and tactics put in place to “organically” grow their franchise.  As our industry continues to rally back from the past few years of pessimism, it really is fun to hear success stories.  So what follows are three thoughts from this week that builds on my time at the Four Seasons in Chicago.

  • While M&A offers immediate growth to the acquirer, I’m hearing that “stocking the bank for talent” is a real long-term challenge. While a bank’s CEO and Chairman must work even more closely to drive bottom line performance while enhancing shareholder value, I left Chicago convinced this team must more aggressively identify — and groom — the next generation of bank leadership. Without the big banks providing management training like they once did (an unintended pipeline of talent for community banks), its time to get creative. For example, while most at our event appreciate the need to get mobile, few community banks have the senior strategist on hand to do so right now. While that opens the door to outside advisors to support an institution, it does present longer term dangers as customers expect access to their banks sans branch or ATM use.
  • Keeping on the tech-to-grow theme, I read an interesting “big data,” bank-specific piece by McKinsey on my way home to D.C.  Personally, I’ve been interested in the various tools and tactics banks employ to analyze their massive amounts of data to detect/prevent fraud, devise customer loyalty plans and proactively approach consumers. This overview, complete with video, touch on these points and show how some are using big data and analytics to sharpen risk assessment and drive revenue.

Aloha Friday to all, especially my niece and sister-in-law on their birthdays.

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Expectations +/- Capacity

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Heading up to 8 at the Four Seasons

The topic of a seller’s expectations and a buyer’s capacity is particularly relevant in light of what Cathy Nash and Jim Wolohan of Citizens Republic Bancorp shared earlier today.   Given that our economic environment is challenging, valuations are depressed and size and scale matter now more than ever, we turned our attention to matters like pricing expectations and the overall state of our financial community by welcoming Ben Plotkin, Vice Chairman of Stifel, to the stage.

Noticeably absent from the bank M&A market in 2012 were the “mega-deals” of years past that have often helped stimulate takeover activity. As I wrote about earlier today, the market made a modest rebound last year, with 230 acquisitions of healthy banks totaling $13.6 billion. But while there were only 150 bank deals in 2011—the third lowest volume since 1989—they totaled $17 billion.  While low levels of loan growth and continued net interest margin compression continue to challenge banks, there is “good news” according to Ben:

  • Profitability has improved (*primarily due to credit leverage);
  • Capital levels are at 70-year highs;
  • Valuations have improved significantly; and
  • M&A discussions are elevating.

To this last point, Ben cites capital access (or the lack thereof) as the driver of consolidation. Thanks to recent stock appreciation, potential buyers enjoy an increased capacity to pay meaningful premiums for smaller institutions and still preserve tangible book value.  As a result, larger institutions with access to the capital markets will most likely pursue M&A in order to overcome their more organic growth challenges.  

On the flip side, smaller institutions, especially those perceived by the investment community as not being able to earn their cost of equity and unable to access the marekets, may consider an “upstream” partnership.  In closing, Ben reiterated that asset growth is essential in order to create the revenue necessary to overcome the cost of doing business.

As with Cathy and Jim, our thanks to Ben for sharing his time and thoughts with us this morning.

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The Strategy to Sell

earplugs at the Four Seasons in Chicago
Needed for the wind here in Chicago… not our speakers

Each year, Bank Director hosts a two day “peer exchange” for CEOs and Chairmen of financial institutions from across the U.S.  This year’s event, held in Chicago at the Four Seasons, kicked off this morning with a spirited presentation by Cathy Nash, the former President & CEO of Citizens Republic Bancorp and Jim Wolohan, the former Chairman of the bank.  I spent some time talking with Cathy and Jim before their presentation; what follows are the highlights of their talk on re-building, and subsequently selling, a bank.

In 2012, there were 230 acquisitions of healthy banks totaling $13.6 billion.  Yes, this equates to more takeovers than the year before, but they were generally smaller in size. While the largest transaction was the $3.8 billion buyout of Hudson City by M&T, the Akron, Ohio-based FirstMerit acquisition of Flint, Michigan’s Citizens Republic garnered quite a lot of attention.

When the deal was announced last September, it was as a stock-for-stock exchange worth $912 million at the time of the announcement (*to put this in perspective, last week’s acquisition of Provident New York by Sterling Bancorp came in at $344 million).  The price to Citizens’ tangible book value at the time of the announcement was 130% — and the combined entity will have roughly $24 billion in assets across five Midwestern states, 415 branches and more than 5,000 employees.

Against this backdrop, we asked this dynamic duo to share their experiences with their peers, starting with how a CEO works with the board to create a successful strategic plan.  According to Cathy, you need to come to the table with options.  Jim elaborated on her point, sharing the bank’s board explored organic growth, a partnership or outright sale of the bank and a combination of organic growth coupled with M&A under Cathy’s leadership.  Both executives knew the bank needed to return to sustainable quarterly profitability; when neither felt they could match their peers’ median returns in an appropriate time frame, a decision started to come into focus.  If they couldn’t deliver more than the cost of capital to their shareholders, exploring a sale had to take the lead. 

The two also explained how to know when it’s time to pare back your offerings to your customers.  According to Jim, shrinking the bank’s asset size once Cathy took the reins from $14 billion to just under $10 billion made sense thanks to rules and regulations like the Durbin amendment found in Dodd-Frank. In Michigan, as the economy soured, the soft and hard costs of growth made the decision slightly easier to bear.  But their focus on the long-term return on equity and investment drove much of their strategy to get ahead by going small(er).

Thanks to Cathy and Jim for opening up.  The decision to buy another bank often takes center stage at events like these, and their honesty in addressing both their struggles and excitement certainly set the tone for today’s program.

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More to come this afternoon; specifically, an update on the state of the financial industry specific to the 43 institutions (21 of which are public) joining us at this year’s Bank Chairman/CEO Peer Exchange.

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Since the SEC approves…

IMG_1596
Taking a peek at the city…

With trips this week to St Louis, Nashville and New York City in the rear-view mirror, forgive me for asking: is it Friday yet? While AA and Amtrak earned my business, it’s the following points that stick out from the week that was:

  • As I’ve written, quite a few banks continue to shy away from social media tools like Twitter, LinkedIn and Facebook. Well guess what. The SEC said its ok to use ’em to disseminate material information without running afoul of their fair disclosure rule (Reg FD). So I wonder how many public banks — Bank Director counts 487 in its database — will start to announce key information on sites like these and subsequently embrace this medium to engage with investors and consumers alike?
  • I was in the Keefe, Bruyette & Woods’ midtown offices yesterday morning. Fortuitous to be there talking M&A as the Provident New York merger with Sterling Bancorp had been announced just hours earlier. As the firm advised Sterling on the $344 million stock-for-stock deal, I left their offices wondering why more transformational deals that have strategic, and not just financial, value like this one aren’t being struck. One thought: a CEO wants to sell at a realistic price but has to overcome a reluctant investor base that comprises the majority of the board. I’m interested in other perspectives, and welcome your comments below.
  • Finally, TD bank’s CEO announced his retirement earlier this week, about a month after PNC’s CEO, James Rohr, did the same. While these decisions certainly remind us of the need for clear succession plans (both banks appear to have handled things seamlessly), it is Mr. Rohr’s comments about cyber security as he winds down his leadership of the bank that struck a nerve. While he could have been talking about the viability of banks under $1bn in asset size to compete, when asked what he thinks of too big to fail, he answered “I’m more concerned about too small to protect yourself… Because what’s happening with the denial of service stuff is it’s moving downstream to small banks who are going to be less capable of defending themselves.” Scary words from someone who is in the know.

and on that lovely note, Aloha Friday to all!

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#FF with a dose of #FI

Sunset in Kona, HI
Three thoughts before the sun sets on the week…

Following the welcome of Pope Francis last week, I’m tempted to call this a slower news cycle and shorten today’s column from three points to two.  But as the sun sets on this week, who am I to short-change the spirit of this #FridayFollow-inspired post?  Especially as I heard/read/saw some pretty darn interesting things since last checking in!

  • Last week, I admitted to a bit of M&A “fatigue.”  Not so seven days later.  With the Koelmel announcement fresh in my head (it should be noted that he led the bank through a period of rapid growth beginning in ’05), I started to think about how history will judge their acquisition of HSBC’s entire upstate New York branch network.  At the time, some thought it would spark what is now a cliché: a “wave of bank consolidation.” So why think back when the purpose of this column is meant to be fresh?  From what I’ve heard (and read), branch acquisitions can present an attractive alternative to traditional M&A.  Case-in-point, a research report put out by Raymond James called Bank M&A: Activity Should Gain Steam in 2013.  While a few months old, their messages remain clear: with the “mega and super regional banks focused on expense control, many are taking a fresh look at reducing their branch networks. In turn, well positioned regional and community banks can look to branch acquisitions, which provide a low risk and cost-effective way to enter a new market or bolster an existing market.”  Not necessarily a new idea, but just as I gave props to Fred Cannon from KBW last week for perspectives like these, let me give a shout out to Anthony Polini and his equity research colleagues for consistently delivering valuable insight and information like this on a regular basis.
  • Turning from M&A to truly organic growth, I was really impressed with a piece Tom Bennett, the Chairman of the three-year old First Oklahoma Bank in Tulsa, Oklahoma, authored for BankDirector.com.  Tom’s piece, The Hidden Capital of Social Networks, introduces the idea of addressing “your equity capital needs and other performance items in your bank… (vis-a-vis) the social capital that exists in your investor group and how it can be utilized as a valuable source of strength.”  With so many CEOs and Chairmen of community banks hoping and wanting their outside directors to generate business for the bank, this piece is definitely worth a read.

Finally, a special thanks to @GilaMonster for providing her input on today’s post… I am very grateful.

Aloha Friday to all!

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Follow Friday Fun

Well what do you know.  On Wednesday, D.C.’s “snowquester” came in like a lion and left, sadly, like a lamb.  So what do we have to hang our hat on this week?  Well, the Federal Reserve did release its stress test results for the country’s largest banks yesterday afternoon.  Interesting enough to make today’s week-in-review?  Take a read through these three stories that I read/watched/heard to find out.

Flying into Boston's Logan
An early approach into Boston’s Logan airport
  • While I wasn’t in my hometown of Boston, MA to hear this first hand, I have it on good authority that a number of the bankers presenting at KBW’s regional bank conference two weeks ago spoke on our country’s rapid move towards energy independence — and on the real economic growth they are seeing in their regions as a result.  If you’re interested, this equity research note (FSW Energy and the Regional Banks), authored by Keefe’s Fred Cannon, is definitely worth a read.
  • Juxtaposing energy needs with banking services reminded me of a “debate” between three bank analysts, including Fred, that centered on comparing banks to utility companies.  Building off those perspectives, I found myself talking with John Eggemeyer (the co-Founder & Managing Principal @ Castle Creek Capital) last Friday afternoon about this very thing.  While it didn’t make it into last week’s post, his hypothesis that the financial community bares all the characteristics of a mature industry sent me searching for white papers I worked on while in business school.  John saved me some of the trouble by reminding me that banking follows a historic pattern of other mature industries (e.g. dealing with excess capacity; which, as a consequence, leads to fierce competition for business).  My big takeaway from our conversation: price, not customer service, proves the ultimate differentiator. 
  • Finally, as John and I talked about what bankers might learn based on the commoditization of businesses, I couldn’t help but think about M&A and organic growth.   This leads me to my third point.  The Washington Business Journal recently recognized the top 5 D.C.-area banks based on total return on assets.  In the piece, authored by Bryant Ruiz Switzky, the area’s 37 local banks posted a median annual profit of $3.5 million in 2012. That’s up 44% from 2011.  Yes, many rankings like this focus on growth in terms of ROA; personally, I’m also keen to look at earnings growth.  Nonetheless, some strong banks on this list… with many more making some real strides here in our Nation’s Capital.

As a bonus, a tip of the cap to an American Banker piece on the hows and whys BankUnited’s private-equity backers are giving up a big chunk of their stakes in the $12.2 billion-asset bank.  While a subscription is required to read yesterday’s “BankUnited to Strengthen M&A Buying Power After Stock Offering,” I think its worth considering the short and longer-term views on what reduced private-equity interest might mean to a bank like this one.

Aloha Friday to all!

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Go west young man?

Yup, that's me moderating a point-counterpoint session on bank M&A
*That’s me on the far left moderating a point-counterpoint at our annual M&A conference

As I head west (to Los Angeles for a few days of meetings), I started to re-read a few recent M&A outlooks for 2013.  Admittedly, I have a pretty long collection of white papers, analyst reports and opinion pieces in my Dropbox thank to our recently wrapped up Acquire or Be Acquired conference.  As I dig through the various projections, it strikes me that capital, liquidity and credit have improved at many U.S. banks since I rejoined the financial community in September of 2010.

Now, I draw no parallel to my return and this improvement — but do take comfort in hearing so many bank executives and board members voice more and more optimism about their months ahead.  That said, when I look back at 2012, I think few would contest that it was a year plagued with limited loan growth & intense margin pressure.

I share this as I think about the factors that will spark more M&A deals in 2013 than 2012. Fortuitously for today’s piece, I have some “inside” knowledge to share.  You see, with more than 700+ joining us at the Phoenician at the end of January, I had the chance to moderate a panel composed of two attorneys and two investment bankers.  I asked each to take a stance — pro or con — on the following statements before opening things up to the audience (of bank CEOs, CFOs, Chairmen and board members from 275 community banks).  What did we find?

  • 68% responded that 2013 will be the best year for bank M&A since the financial crisis of 2008.
  • It was a near dead heat (52% taking the con) that pricing for a well performing bank less than $1 billion will not exceed 1.25X tangible book or less.
  • 58% voted that the primary obstacle to doing a deal will be unrealistic price expectations of sellers.
  • 60% voted that banks that are thinking of selling would be better off waiting until 2014 when valuations will be higher that they are likely to be in 2013.

Not surprisingly, a strong and vocal 72% disagreed with the idea that banks need to be a minimum of $1 billion in asset size to be competitive in today’s market.  While certain economies of scale tip in favor of those above our industry’s magic number, I have to agree with the majority on this one.  Yes, compliance costs continue to escalate — and regulatory burdens, well, don’t get me started…

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For more on this three-day conference, I encourage you to read “A Postcard from AOBA 2013.”  Penned by our editor, Jack Milligan, his gift with the written word writes circles around my amateur efforts.