Quick Guide: Bank Mergers & Acquisitions

Mergers & Acquisitions will continue to serve as one of the biggest revenue drivers for banks in the United States.

By Al Dominick // @aldominick

I’m in Chicago to host Bank Director’s annual Bank Audit & Risk Committees Conference, an exclusive event for Chief Executive Officers, Chief Financial Officers, Chief Risk Officers, Chairmen and members of the board serving on an audit or risk committee.  As I reviewed my speaker notes on yesterday’s flight from D.C., it strikes me that of all of the risks facing a bank’s key leadership team today — e.g. regulatory, market, cyber — knowing when to buy, sell or grow independently has to be high on the list.

While we welcome officers and directors to a series of peer exchanges and workshops today, the main conference kicks off tomorrow morning. To open, we look at the strategic challenges, operating conditions and general outlook for those banks attending this annual event.  With public equities and M&A valuations at multi-year highs, numerous institutions having raised capital to position themselves as opportunistic buyers and sellers continuing to take advantage of a more favorable pricing environment, I thought to share three points about bank M&A for attendees and readers alike:

  1. In 2014, there were 289 whole-bank M&A transactions announced (and 18 failed-bank transactions) for a total of 307 deals. Through the first quarter of this year, there have been 67 whole-bank M&A transactions announced and just 4 failed-bank transactions.
  2. KPMG’s annual Community Banking Outlook Survey illustrates that M&A will be one of the biggest revenue drivers for community banks over the next three years, especially as community banks face the need to transform their businesses in an effort to reach new customer segments and streamline their operations.
  3. The continued strengthening of transaction pricing — with 2015 transaction multiples at the highest levels since 2008 — is an important and emerging trend.

According to Tom Wilson, a director of investment banking with the Hovde Groupmany of the factors driving the current M&A cycle have been well documented and remain largely unchanged.  These include improving industry fundamentals, increased regulatory costs, net interest margin compression in a low rate environment, industry overcapacity and economies of scale.  As he notes, while those themes have been playing out in various forms for several years, some additional themes are emerging that are significantly impacting the M&A environment; for example, “the advantages of scale are translating to a significant currency premium. For years we have seen a significant correlation between size, operating performance and currency strength. Lately, that trend has become a significant currency advantage for institutions with greater than $1 billion in assets and resulted in smaller institutions being constrained in their ability to compete for acquisition partners because of a weaker valuation.”

Moreover, an industry outlook published by Deloitte’s Center for Financial Services earlier this year says that the “M&A activity seen in 2014 is likely to continue through 2015, driven by a number of factors: stronger balance sheets, the pursuit of stable deposit franchises, improving loan origination, revenue growth challenges, and limits to cost efficiencies.” However, their 2015 Banking Outlook also acknowledged that “as banks move from a defensive to an offensive position to seek growth and scale, they should view M&A targets with a sharper focus on factors such as efficiencies, growth prospects, funding profile, technology, and compliance.”

##

For those looking for more on bank M&A, let me suggest a read of our current digital issue (available for free download through Apple’s App Store, Google Play and Amazon.com).  In it, we look at how to “bullet-proof” your deal from shareholder lawsuits and have a great video interview with ConnectOne Bank’s CEO, Frank Sorrentino, who talks about how his bank fought back against fee-seeking shareholder activists.  To follow the conversations from the JW Marriott and Bank Director’s annual Bank Audit & Risk Committees Conference, check out #BDAUDIT15, @bankdirector and @aldominick.

Bank Mergers and Acquisitions

“The reality is organic growth is tough,’’ said Chris Myers, the president and CEO of the $7.2-billion Citizens Business Bank in Ontario, California, who spoke at our Acquire or Be Acquired conference in January.  His bank is one of those in the “sweet spot” for higher valuations and higher profitability, but even he feels the pressure to grow. “A lot of banks are stretching to try to grow [loans] and do things they wouldn’t have done in the past,’’ he said, commenting on the competition for good loans. “ We are going to need to do some acquisitions.”

By Al Dominick // @aldominick

The classic build vs. buy decision confronts executives in every industry.  For bank CEOs and board members today, mergers and acquisitions (M&A) remain attractive inasmuch as successful transactions improve operating leverage, earnings, efficiency and scale.  While I recently wrote that the best acquisition a bank can make is of a new customer, today’s post looks at what’s happening with bank M&A by sharing a few of my monthly columns that live on BankDirector.com:

  • Why Big Banks Aren’t Merging — with global companies announcing huge acquisitions, I look at where the banking industry is today.
  • Stressed Into Selling — after the largest U.S.-based banks passed the Federal Reserve’s stress tests, I write about modeling various economic conditions that might help a bank’s board to anticipate potential challenges and opportunities.
  • Don’t Sell The Bank —  figuring out when a bank should be a buyer—or a seller—had been on my mind since the Royal Bank of Canada announced a deal for “Hollywood’s bank,” City National, and this piece explored why now is not the time to sell.
  • Why Book Value Isn’t the Only Way to Measure a Bank — as the market improves and more acquisitions are announced, why I expect to see more attention to earnings and price to earnings as a way to value banks.
  • Deciding Whether to Sell or Go Public — while the decision to sell a company weighs heavily on every CEO, there comes a point where a deal makes too much financial and cultural sense to ignore.

In addition to these five columns, I invite you to read this month’s column, “Mind These Gaps,” which posts today on BankDirector.com.  It focuses on various pitfalls that have upended deals that, on paper, looked promising (e.g. due diligence and regulatory minefields, the loss of key talent/integration problems and bad timing/market conditions).  With perspectives from some of the country’s leading investment bankers and attorneys, it is one I’m pleased to share.  Don’t worry, unlike other sites, there is no registration — or payment — required.

From Bank Director’s 2015 Acquire or Be Acquired Conference: A 45 Second Video Recap of Day One

On Tap For Day Two

Last night, I shared three takeaways from our first day at AOBA (Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference).  Looking ahead to our second full day, we kick things off with a series of discussion groups that address the following issues:

  • IPO or Sale? Key Factors Bank Executives Should Consider
  • How Banks Should Make the Decision to Sell or Buy – Lessons for Buyers & Sellers
  • How Size Matters: Regulatory Considerations for Deals
  • How Does a Buyer Begin The M&A Process?
  • The Characteristics of a Well Received Deal: The Importance of Gauging the Market’s Reaction For Both Buyers and Sellers

From there, we move into various general and breakout sessions.  These range from presentations on “The Power of In-Market Mergers” to “Are You a Buyer or Seller… or Something Else?”  To see a high-level, PDF version of the three day agenda, please click 2015 AOBA Agenda (Overview).

##

This afternoon, I’ll post a brief video recap of our first general session and later, three things I picked up over the course of the day.  To follow the conversation on Twitter, I invite you to follow me @aldominick, follow @bankdirector and tweet using the hashtag #AOBA15.

Bank Director’s 2015 Acquire or Be Acquired Conference

Banks are increasingly interested in the topic of mergers and acquisitions, which must have something to do with our record attendance at this year’s Acquire or Be Acquired Conference in Scottsdale, Arizona.

The fun begins at The Phoenician (pictured above) this weekend with Bank Director’s 21st annual “AOBA.”  Last year, we welcomed 435 officers & directors from 271 financial institutions to the Arizona Biltmore.  This year, we have 522 bankers and bank board members from more than 300 banks in attendance. Merger activity is clearly gaining steam, and this is bringing more interested parties to the table.

AOBA15-demographics-2

Three Days in the Desert

Why banks are bought (or sold) involves much more than just the numbers making sense.  Moreover, to successfully negotiate a merger transaction, buyers and sellers must bridge the gap between a number of financial, legal, accounting and social challenges. So allow me to sketch out what’s on tap for this massive three-day event.

On Sunday…

To kick things off, we take a macro-level look at capital markets and operating conditions for banks nationwide. Additionally, we look at how M&A fits within a broad range of strategic options for a bank’s board and how some successful acquirers have aligned transactions to achieve strategic goals.  Of note, we welcome the perspectives of CEOs from high performing banks like Pinnacle National Bank, Banner Corp.First Interstate BancSystem, IBERIABANK and CVB Corp. as part of several presentations. On stage, these men will share their thoughts on what it takes to build and lead successful institutions.

On Monday…

Building on the first day of the conference, we turn our attention to the long-term preparation required by both a buyer and seller.  For instance, regulatory planning remains critical to getting deals done for both sides — especially on compliance issues.  Thematically, Monday builds on Sunday’s presentations, with sessions dedicated to helping a bank’s board make a rational buy, sell or hold decision.

On Tuesday…

To put a bow on this year’s event, we start with a look at what the biggest banks are doing today followed by a series of breakout sessions on more in-depth topics.  To conclude, we welcome the perspectives of our friends from NASDAQ who will look at trends, issues and the “movers and shakers” in the technology world that may impact growth and innovation within the financial community.  As much as AOBA explores one’s financial growth opportunities, this final session examines what’s happening outside of our industry that may precipitate new changes or challenges to a bank’s growth aspirations.  Oh and in the afternoon… we swap suits for cleats, wrapping up AOBA with our annual golf tournament.

Can’t Make it?

For those not able to join us — but interested in following the conversations — I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA15 to see what is being shared with our attendees.

Bank Director’s 2015 Acquire or Be Acquired Conference Primer

On Sunday, January 25, we kick off Bank Director’s 21st annual “Acquire or Be Acquired” Conference (@bankdirector and #AOBA15) at the luxurious Phoenician resort in Scottsdale, Arizona.  I am so very excited to be a part of this three day event — and am supremely proud of our team that is gearing up to host more than 800 men and women.  With so many smart, talented and experienced speakers on the agenda, let me share a primer on a few terms and topics that will come up.  In addition, you will find several links to recent research studies that will be cited before I share one example of the type of issues being both presented and addressed at “AOBA.”

Colorful Language

Just as M&A is a colorful — and complex — issue, so too are the words, terms and considerations used by attorneys, investment bankers and consultants in management meetings, in the boardroom or at the negotiating table.  Here are three terms I thought to both share and define in advance of AOBA (ay-o-bah):

  • Triangular merger: This happens when the acquirer creates a holding company to acquire the target and both the acquirer and the target become subsidiaries of the holding company.
  • Cost of capital: You could say this is the cost to a company of its capital, but another way to look at it simply is this: the minimum return you need to generate for your investors, both shareholders and debt holders. This is what it costs you to operate and pay them back for their investment.
  • Fixed exchange ratio: This is the fixed amount for which the seller exchanges its shares for the acquirer’s shares. If the buyer’s stock price falls significantly post-announcement, that could mean the seller is getting significantly less value.

Again, these are but three of the many terms one can expect to hear when it comes to structuring, pricing and negotiating a bank merger or acquisition.

Research Reports

Throughout the year, our team asks officers and directors of financial institutions to share their thoughts on board-specific issues — like growth and more specifically, mergers & acquisitions.  Allow me to share an overview on these two research reports along with links to the full results:

Of note: 84% of the officers and board members who responded to this Growth Strategy Survey, sponsored by the technology firm CDW, say that today’s highly competitive environment is their institutions’ greatest challenge when it comes to organic growth — a challenge further exacerbated by the increasing number of challengers from outside the industry primed to steal business from traditional banks.

Of note: There’s no shortage of financial institutions seeking an acquisition in 2015, but fewer banks plan to sell than last year, according to the bank CEOs, senior officers and board members who completed Bank Director’s 2015 Bank M&A Survey, sponsored by Crowe Horwath LLP.

Valuing a Bank

Understanding what one’s bank is really worth today is hugely important.  Whether buying, selling or simply growing organically, a bank needs metrics in place to know and grow its valuation.  On BankDirector.com this past October, I shared why earnings are becoming more important than tangible book value (Why Book Value Isn’t the Only Way to Measure a Bank). Clearly, a bank that generates greater returns to shareholders is more valuable; thus, the emphasis on earnings and returns rather than book value.  Yes, investors and buyers will always use book value as a way to measure the worth of banks. Still, I anticipate conversations at the conference that builds on the idea that as the market improves and more acquisitions are announced, we should expect to see more attention to earnings and price-to-earnings as a way to value banks.

##

Please feel free to comment on today’s piece below or share a thought via Twitter (I’m @aldominick).  More to come from the “much-warmer-than-Washingon DC” Arizona desert and Acquire or Be Acquired in the days to come.

On Bank Branches and a Bank’s Brand

When I think about top performing banks, I typically consider those with the strongest organic growth in terms of core revenue, core noninterest income, core deposit growth and loan growth.  Sure, there has been a lot of talk about growing through acquisition (heck, last week’s post, “Seeking Size and Scale” looked at BB&T’s recent acquisitions and my monthly column on BankDirector.com was entitled “Why Book Value Isn’t the Only Way to Measure a Bank“).  But going beyond M&A, I’m always interested to dive into the strategies and tactics that put profits on a bank’s bottom line.

Build Your Brand or Build Your Branch

Earlier in the week, KBW’s Global Director of Research and Chief Equity Strategist, Fred Cannon, shared a piece entitled “Branch vs. Brand.”  As he notes, “branch banking in the U.S. is at an inflection point; the population per branch has reached a record level in 2014 and is likely to continue to increase indefinitely. The volume of paper transactions peaked long ago and with mobile payment now accelerating the need for branches is waning. As a result, many banks see closing branches as a way to cut costs and grow the bottom line. However, branches have served as more than transactional locations for banks. The presence of branch networks has projected a sense of identity, solidity and ubiquity to customers that has been critical to maintaining a bank’s brand.”  He then poses this doozy of a question:

“If branch networks are reduced, what is the replacement for a bank’s identity?”

Fred and his colleagues at KBW believe banks need to replace branches with greater investments in brand. As he shares, “some of this investment will be in marketing, (as) a brand is more than a logo. We believe banks will also need to invest in systems, people, and processes to project the sense of identity, solidity, and ubiquity that was projected historically by branch networks.”

United Bank, An Example of a High-Performing Bank

One example of a bank that I think is doing this well is United Bank.  On Wednesday, I had the chance to check out their new financial center in Bethesda, MD.  With dual headquarters in Washington, DC and Charleston, WV, the $12.1 billion regional bank holding company is ranked the 48th largest bank holding company in the U.S. based on market capitalization. NASDAQ-listed, they boast an astonishing 41 consecutive years of dividend increases to shareholders – only one other major banking company in the USA has achieved such a record.  Their acquisition history is impressive — as is their post-integration success.  United continues to outperform its peers in asset quality metrics and profitability ratios and I see their positioning as an ideal alternative to the offices Wells Fargo, SunTrust and PNC (to name just three) operate nearby.

A Universal Priority

Clearly, United’s success reflects a superior long-term total return to its shareholders.  While other banks earn similar financial success, many more continue to wrestle with staying both relevant and competitive today.  Hence my interest in Deloitte’s position that “growth will be a universal priority in 2015, yet strategies will vary by bank size and business line.”  A tip of the hat to Chris Faile for sharing their 2015 Banking Outlook report with me.  Released yesterday, they note banks may want to think about:

  • Investing in customer analytics;
  • Leveraging digital technologies to elevate the customer experience in both business and retail banking;
  • Determining whether or not prudent underwriting standards are overlooked; and
  • Learning from nonbank technology firms and establish an exclusive partnership to create innovation and a competitive edge.

With most banks exhibiting a much sharper focus on boosting profitability, I strongly encourage you to see what they share online.

Aloha Friday!

Seeking Size and Scale

With Wednesday’s announcement that BB&T has a deal in place to acquire Susquehanna Bancshares in a $2.5 billion deal, I felt inspired to focus on the mergers & acquisitions space today.  You see, if 2013 was the year of the merger-of-equals (MOEs), it seems that 2014 has become the year of “seeking size and scale.”

As I’ve shared in past posts, 2013 was characterized by a series of well-structured mergers which produced a dramatic improvement in shareholder reaction to bank M&A.  For example, Umpqua & Sterling,  United Financial Bancorp & Rockville Financial and Bank of Houston & Independent Bank.  Over the past few weeks, we’ve seen some pretty interesting transactions announced that are not MOEs; specifically, Sterling Bancorp buying Hudson Valley Holding in New York, Banner picking up AmericanWest Bank in the Pacific Northwest and the afore-mentioned BB&T deal.

Don’t Be Fooled, Size Matters

As evidenced by the Sterling and Banner acquisitions, the desire for scale and efficiencies is prompting certain institutions to expand.  While regulatory costs and concerns have been cited in previous years as deterents to a transaction, isn’t it interesting that both of these deals position the acquiring institution near the $10Bn threshold (*important as crossing this asset threshold invites new levels of scrutiny and expense).  But like John Thain suggested earlier this year, “the key is being big enough so that you can support all of the costs of regulation.”  Still, comments made by Richard Davis, chairman and chief executive of U.S. Bancorp, about the BB&T agreement should temper some enthusiasm about the biggest players jumping in to the M&A space a la the $185 Bn-in-size BB&T. “This is not a deal you’d ever see us do,” he said at conference in New York hosted by Bank of America Merrill Lynch, adding “it’s both out-of-market and it’s fairly expensive.”

I’m Serious, It Matters?!?

Earlier this year, Deloitte published The Top Ten Issues for Bank M&A.  In light of the BB&T deal, it is worth revisiting.  To open, the authors opine “size matters when it comes to regulatory constraints on the banking sector: The bigger the players, the more restrictions on banking activities, including M&A. Banks with less than $10 billion in total assets face the least restriction, while the very largest Systemically Important Financial Institutions (SIFIs) experience the highest level of constraints. Among the major regulatory actions that are expected to hold considerable sway over bank M&A in 2014 are the Volcker Rule, Basel III capital requirements, global liquidity rules, stress testing, and anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance laws.”

Who I’m Taking to Buy a Lottery Ticket

Finally, a tip of the hat to Frank Cicero, the Global Head of Financial Institutions Group at
Jefferies. He reminded me on Wednesday that every prediction he made in a piece he wrote for BankDirector.com at the beginning of the year has come to pass…fewer MOE’s, bigger premiums, regional banks returning to bank M&A.  Personally, I’m wondering if he wants to walk into the lotto store with me this weekend?

Aloha Friday!

Time To Sell The Bank?

From the the appeal of spreading into new geographies to the attractiveness of acquiring exceptional talent to drive new sources of revenue, the need and desire to grow exists at virtually every financial institution. For those pursuing another bank, a merger or acquisition (M&A) provides an avenue to drive earnings while improving operating leverage, efficiency and scale. I have written about M&A from a potential buyers point-of-view (e.g. Acquire or Be Acquired – Sunday Recap); today’s piece flips the script and highlights three issues that may precipitate a sale.

Compliance Costs

Banks are facing some very significant challenges in the years ahead — and not just from consolidation.  As KPMG shared in its An Industry At a Pivot Point, “the costs and time stresses created by the regulatory environment are not going away, and will continue to affect four areas for banks: strategy and business models, interactions with customers and client assets, data and reporting structures, and governance and risk capabilities.”  Certainly, 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.

Capital Concerns

Some banks will have to raise capital just to meet the Basel III requirements, while others will have to raise capital to do an acquisition or support their organic growth. The required levels are so much higher now that banks will have to manage their capital much more closely than they did before.  (*If you’re looking for a central resource for the many ongoing regulatory changes that are reshaping bank capital and prudential requirements in the United States, take a look at Davis Polk’s excellent Capital and Prudential Standards Blog.)

Earnings Pressure

As the attractiveness of branch networks and deposit franchises dwindles, lack of top-line growth will lead to further industry consolidation. With little overall changes in our economy, in-market mergers between banks with significant overlap in branches and operations offer tremendous cost-saving opportunities when done skillfully.

##

To comment on this piece, click on the green circle with the white plus sign on the bottom right. Aloha Friday!

Acquire or Be Acquired – Sunday Recap

The most successful banks have a clear understanding and focus of their market, strengths and opportunities.  One big takeaway from the first full day of Bank Director’s Acquire or Be Acquired Conference (#AOBA14 via @bankdirector): it is time for a bank’s CEO and board to reassess their strategic opportunities.

_4323183253
thanks to Keith Alstrin of Alstrin Photography

90 Second video recap

Looking for profitability cures

From the strategies and mechanics behind transactions to the many lingering questions regarding industry consolidation, economies of scale, regulatory burdens and how to build long-term value, today featured some pretty fascinating presentations.  One of the common themes from the afternoon sessions: most bankers are looking to cure profitability challenges through some kind of M&A activity.

How much are you worth
Whether buying, selling or simply growing organically until it’s time for a transaction, a bank’s leadership team needs metrics in place to know and grow its valuation.  As we heard today, valuation is a controversial and complex subject.  To wit: it requires an in-depth understanding of a company, its market and competitors, financial and non-financial information.  In addition, factors such as the legal and regulatory environment proves quite a challenge.

Trending topics
Overall, the issues I took note of where, in no particular order: margin compression, deposit funding, efficiency improvements and business model expansion in the context of the current environment. Also, keep an eye on the the Northeast and greater Atlanta area this year for increased merger and acquisition activity.

More to come from the Arizona Biltmore tomorrow…