On Recent Bank Mergers and Acquisitions

Earlier this week, American Banker’s Robert Barba wrote that bank M&A could reach an “inflection point” (sorry, paywall). With bank valuations increasing — and asset quality improving — I’m seeing deal premiums make a comeback, along with banks able to pay them.  The title of Robert’s piece caught my attention, as did his look at BB&T’s agreement in early September to buy the $2 billion-asset Bank of Kentucky Financial in Crestview Hills.  While that high-stakes deal has generated headlines, let me share some observations about another transaction that “shows well.”

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As Robert wrote on Tuesday, the $188 billion-asset BB&T is “often viewed as one of the bigger banks most likely to acquire. It managed to make a few deals during the downturn, including buying the operations of BankAtlantic from its holding company and picking up Colonial Bank’s assets and deposits from the Federal Deposit Insurance Corp.”  While this deal alone does not represent a resurgence of big bank M&A, it might foreshadow a pick up in activity.

Of course, 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.  For this reason, I wrote a piece for BankDirector.com called “Deciding Whether to Sell or Go Public” earlier this week (no registration required).  As you can read, David Brooks, the chairman and CEO at $3.7-billion asset Independent Bank Group based in McKinney, Texas, and Jim Stein, the former CEO of the Bank of Houston and now vice chairman of Independent Bank, talked with me about their experiences and decision to merge their banks.

With merger activity on the rise, more boards of directors are considering whether the time is right for their financial institution to find a strategic partner, especially if they want to maintain the strategic direction of the institution or capture additional returns on their shareholders’ investment.  In the end, no one knows what will happen with bank M&A in the coming months, but looking at deals like the one Robert wrote about and the one I shared… well, one can guess.

Aloha Friday!

FinTech Day is September 8

A sneak peek at Monday’s “FinTech Day” at the NASDAQ’s MarketSite in New York City — a collaboration between the exchange and Bank Director that celebrates the contributions of financial technology companies to banks in the U.S.

Well, it was bound to happen.  According to an August 31 column on Re/code, Apple reached an agreement with American Express to work together on its new iPhone payments system.  For Apple, “the introduction of its own iPhone payments product will end years of speculation about when it will take advantage of its massive file of hundreds of millions of credit cards from iTunes and App Store customers to create its own mobile wallet.”  

This new payment system is just one of many very real threats to financial institutions’ business models posed by non-bank competition like Apple, PayPal and Walmart.  Admittedly, I’ve spilled my fair share of digital ink on myriad fintech companies purporting to transform the banking universe.  While some compete with established institutions, I find I am more inclined to focus on those supporting banks’ growth initiatives.  After all, the barriers for new players to enter our industry are significant.  Coupled with the snarling complexities of regulation and compliance already beating down most established institutions, it strikes me that collaboration rather than competition should be the buzz word at technology companies thinking about banking business today.

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Not so coincidentally, I will explore the issue of competition — along with innovation — with the Managing Director of Strategic Growth Initiatives at BNY Mellon, Declan Denehan, on Monday afternoon.  The two of us will share the stage — and concurrently, the video camera — for an hour-long session that looks at how bank executives can encourage new, innovative business efforts.  BNY Mellon is not just one of the oldest banks in the U.S. — its origins stretch back to the establishment of the Bank of New York in 1784 by Alexander Hamilton — it is also the largest deposit bank in the world.  So as the organization invests and/or partners in companies with strategically important business models or technologies, I’m eager to get Declan’s take on:

  • Innovation frameworks (think cost saves, incrementalism, etc) that may benefit institutions of all sizes;
  • The emerging technologies every bank’s CEO and board should have on their radar; and
  • How banks successfully work within the startup ecosystem.

Thanks to our friends at the NASDAQ, our Q&A will be live-streamed at 2 PM ET (click here to register for free).  I invite you to log on and watch on their site or bookmark BankDirector.com (once the video posts to our homepage, I’ll update this site and share via Twitter).  Additionally, a webcast of the NASDAQ Closing Bell will be available at 
https://new.livestream.com/nasdaq/live or http://www.nasdaq.com/about/marketsitetowervideo.asx if you are keen to see how we wrap up FinTech Day.

Aloha Friday!

Monday Morning Takeaways: Growth-focused

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As we open up the Four Seasons “dining hall” for lunch, allow me to share some trending topics I took note of this morning at Bank Director’s Bank Chairman & CEO Peer Exchange.  For example, virtually every financial institution cites maximizing shareholder value or franchise value as their overriding strategic objective.  In addition:

  • Four significant challenges face community banks today:
    • Tepid loan growth;
    • Margin compression;
    • Higher capital requirements; and
    • Expense pressure & higher regulatory costs.
  • These five issues confront/confound CEOs and Chairmen:
    • What is our unique strategy for revenue and profitability growth?
    • How do we attract and retain best talent?
    • How do we deal with growing compliance burden?
    • How do we take advantage of technology?
    • How do we lower our efficiency ratios?
  • I wrote about size earlier today; the “sweet spot” for banks, at least from an investor’s perspective, depends on where you are in the country, but think the $5Bn to $15Bn range. A lot of work is being done through IPOs and M&A to get to that spot.
  • Since 2013, the traditional bank IPO market has revived and there have been numerous success stories. According to a presentation made by an EVP at KBW this morning, the capital markets for banks and thrifts with assets less than $10 billion have been dominated by common stock issuance, while larger banks have relied predominantly on senior debt.

Finally, on the M&A front, consolidation is in line with historical rates, and we may see 220-230 mergers done this year.  More to come from Chicago.  Keep current via Twitter and @aldominick, @bankdirector and with #chair14.

Building a Higher Performance Bank Board

This is the first of five bank director “education”-type posts on About That Ratio.  Against yet another snowstorm in D.C., I’m gearing up for a Bank Board Training Forum in Nashville later this week and will share various thoughts that tie into our “strong board, strong bank” philosophy.

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Today’s post is not a “check the box” criteria for how a bank’s board should operate; rather, a personal observation based on numerous conversations with CEOs, Chairmen and outside directors.  Simply, when it comes to building a high performance board, I would ask each member of the board to consider:

  1. Are you prepared to lead when something big happens (e.g. a regulatory agency takes action against the institution… an unexpected takeover attempt, etc.)?
  2. Have you given succession planning serious time and attention for your next generation of leaders?
  3. What kind of diversity of perspective do your fellow board members bring to the table – and how are these used to strengthen the bank?

Although bank boards have certain duties that have been prescribed by law or regulation, I’ve learned that an individual board’s role is defined as much by culture and tradition as by an external requirement.  While building a higher performance board is as much an art as it is a science, I’ve found asking “better questions” leads to better results.

If you’re interested…

Here are three free resources that can help you go deeper into this topic today:

  • Jack Milligan authors The Bank Spot – a must-read blog about banks & banking, written from the perspective of a veteran financial journalist (and yes, Bank Director’s editor)
  • Weil is one of the pre-eminent corporate governance counsel
  • McKinsey recently published “Building a Forward-Looking Board” (registration required)

Acquire or Be Acquired – Monday Recap

Two big takeaways from the second day of Bank Director’s 20th annual Acquire or Be Acquired conference (#AOBA14): given the improving economic environment and low interest rates, lack of top-line growth could lead to further industry consolidation while regulatory burdens are increasing the need for scale in the industry.

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Keith Alstrin of Alstrin Photography

90 Second video recap

Peering into a crystal ball

What if I told you that by December 31, 2018, we’d witness a 25% decline in the number of institutions between $500mm and $1bn, a 50% decline in the number of institutions between $1bn and $5bn, a 50% increase in the number of institutions between $5bn and $15bn and 5% annual decrease for all other categories? I can’t take credit for this consolidation prediction… that goes to Ben Plotkin the Executive Vice President, KBW and Stifel and Vice Chairman, Stifel Financial Corporation. He opened today’s conference with a look at merger activity and “its impact on the transformation of the banking industry.” Just one of many thought-provoking parts to today’s program.

Staging a Family Exit

The family dynamic in closely held banks is a powerful driver in bank mergers and acquisitions today, and deals involving closely held financial institutions often take a very different tack than transactions by their publicly traded brethren.  With a number of smaller banks represented here — many of whom are family owned or are thinly held, I wasn’t surprised that one of our best attended breakout sessions focused on how banks, with under 500 shareholders, might consider staging a successful exit.

Trending Topics

Overall, the issues I took note of where, in no particular order: banking is absolutely an “economies of scale” business; investors want to invest in buyers, not try to pick the sellers; the term “merger of equals” may be a misnomer; however, there are real benefits of a strategic partnership as banks look to stay relevant and achieve scale; BSA and AML issues have derailed and/or prevented quite a few deals from ever seeing the light of day.

More to come from the Arizona Biltmore tomorrow afternoon…

Giving Thanks

Winston Churchill once said, “a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”  I believe we all aspire to see the proverbial glass as half full — so this quote is one I thought to share as we wrap up this Thanksgiving week.  As I do each Friday, what follows are three things I’m thinking about; in this case, what I’m grateful for — in a professional sense — that reflects Churchill’s sentiment.

(1) The Harvard Business Review ran a piece this April entitled Three Rules for Making a Company Truly Great.  It began “much of the strategy and management advice that business leaders turn to is unreliable or impractical. That’s because those who would guide us underestimate the power of chance.”  Here, I want to pause and give thanks to my tremendous colleagues at Bank Director — dreamers and implementors alike — who prove that fortune really does favor the prepared mind (and team).

(2) I believe that leadership is a choice and not a position.  As a small company with big ambitions, I find that setting specific directions — but not methods — motivates our team to perform at a high level and provide outstanding support and service to our clients.  This parallels the principle value of McKinsey & Co., one eloquent in its simplicity: “we believe we will be successful if our clients are successful.”  I read this statement a number of years ago, and its stuck with me ever since.  As proud as I am for our company’s growth, we owe so much to the trust placed in us by nearly 100 companies and countless banks.  Personally, I am in debt to many executives for accelerating my understanding of issues and ideas that would take years to accumulate in isolation.  Since returning to Bank Director three years ago, I have been privileged to share time with executives from standout professional services firms like KBW, Sandler O’Neill, Raymond James, PwC, KPMG, Crowe, Grant Thornton, Davis Polk, Covington, Fiserv… and the list goes on and on.  These are all great companies that support financial institutions in significant ways.  Spending time with executives within these firms affords me a great chance to hear what’s trending, where challenges may arise and opportunities they anticipate for their clients.  As such, I am thankful to be in a position where no two days are the same — and my chance to learn never expires.

(3) Finally, I so appreciate the support that I receive from my constituents throughout our industry.  It might be an unexpected compliment from a conference attendee, a handwritten thank you note from a speaker or the invitation to share my perspectives with another media outlet.  Regardless of how it takes shape, let me pay forward this feeling by thanking our newest hires, Emily Korab, Taylor Spruell and Dawn Walker, for expressing an interest in the team we’ve assembled and goals we’ve set.  Taking the leap to join a company of 17 strong might scare some towards larger organizations, but I’m really excited to work with all three and expect great things from each.

A late Happy Thanksgiving and of course, Aloha Friday!

A Picture Worth 1,000 Words

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Bill Greene / The Boston Globe

Before posting my regular column to About That Ratio, a Big congratulations to the Boston RedSox.  As a lifelong fan, this team personifies the “Team > Me” concept.  Beating the St. Louis Cardinals in six games… wow, what a feat.  Doing it in front of the Fenway faithful.  Priceless.

Boston Strong on this Financial Friday

Yes, I typically compile a list of three things that I heard, saw and learned this week that are financially focused. Today, it still feels hollow to post such points when my attention has admittedly stayed with the acts of courage, strength and community in Boston. Instead of a normal Friday post, let me share the following. Like 9/11, we will never forget. And yes, together, we are all #BostonStrong.

Since the senseless acts of violence in my hometown earlier this week, I’ve been playing over and over in my head my time in NYC on 9/10/01 and 9/12/01. Having watched both towers fall from the roof of my old east village apartment — 60 east 1st Street — the Boston Marathon’s bombing has me really shaken. You see, I grew up in Needham, MA and lived at 221 Newbury Street for several years after moving post-World Trade Center attacks. For those not familiar with Boston, this is a mere 1 1/2 blocks from the finish line on Comm Ave. Still, from the darkness of this week comes these three points of light:

(1) If you haven’t seen this already, watch the crowd sing the National Anthem at the Boston Bruins / Buffalo Sabres hockey game on Wednesday night. Massive chills for both the Bruins feed from the ice above (seriously, stop reading + watch this now) and this one from the rafters as a full house of patriots take over for Boston Bruins’ legendary anthem singer Rene Rancourt…

(2) To me, the RedSox ARE Boston… and their immediate actions following Monday’s tragedy conjured memories of the Patriots’ post-9/11 (*running out on the field with American flags held high). Sometimes baseball is more than just a sport. This is one of those times…

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3) Finally, they are our most hated rival — and in this case, our greatest ally. The New York Yankees are a class act & deserve more than just a tip of the cap for this immediate show of support. Despite our differences, what makes our country great is the love of our country.

New York Stands With Boston
New York Stands With Boston

“If they sought to intimidate us, to terrorize us … It should be pretty clear right now that they picked the wrong city to do it” ~ President Obama

The Strategy to Sell

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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.

Since the SEC approves…

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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!

A #FF-Inspired Financial Roundup

Checking in from St. Louis, the “Gateway to the West”

A somewhat abbreviated Friday Follow-inspired post (coming to you from the great state of Missouri). On this Good Friday, I’m keeping things simple and sharing “just” three things I learned this week.

  • Of the news this week, Senator Tim Johnson’s announcement that he will not seek re-election in 2014 is especially noteworthy.  Why?  Well, the Democrat from South Dakota chairs the powerful Senate Banking Committee.  His departure, according to this report from the Wall Street Journal, sets the stage for a hotly contested race to succeed him.  This should interest many bank executives; “while he is regarded as sympathetic to the concerns of financial firms that operate in his home state, including community banks, Mr. Johnson has also fought GOP attempts to roll back or water down portions of the Dodd-Frank financial overhaul law.” I wonder if the next chair will push for legislation to breakup the big banks as the committee has discussed?  As you can read in the American Banker (subscription required), guessing has already begun.
  • While I’d like to move off the topic of legislation and regulation, our own Chairman forwarded a client alert from the law firm of Goodwin Procter that kept my attention on rules and procedures.  The title, Nasdaq Proposes Rule Requiring Internal Audit Function at All Listed Companies, says a lot.  As you dig in, you’ll see this would go into effect by year-end.  From a bankers point-of-view, financial institutions that are publicly traded already face the pressure of doing more with fewer resources.  Every business function, including internal audit, is expected to bring value to an institution.  So, much like the Senator’s announcement, this proposed rule is one to watch.
  • Finally, on the payments front, there’s been a lot of talk about the mobile consumer and his/her mobile wallet.  For example, how Google Wallet poses a threat to big banks that make $$ off of card products.  Yes, mobile devices have increasingly become tools that consumers use for banking, payments, budgeting and shopping. However, in this WSJ article (Consumer Using Phones to Bank, but Not Buy) we’re told “Americans are increasingly using their phones to avoid a trip to the bank, but they still have little interest in having mobile devices replace their wallets.”  The piece builds on the results of a Federal Reserve survey released on Wednesday.  The Fed finds the adoption of various tools isn’t as robust as one might be led to believe.  If you have the time, it might be worth downloading the Fed’s results.

Aloha Friday!