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 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!

Happy July 5th!

Union Station in D.C.
Union Station in D.C.

As we wrap up this short week, here are three “stories” that caught my eye. As I pack my family up for a few week’s vacation in New England, please enjoy. Happy 5th of July!

1. On Monday, Curtis Carpenter shared with me the news that Prosperity Bank in Texas acquired First Victoria — a deal struck for approximately 2.3x tangible book and 18x earnings. As Houston’s Business Journal details, Prosperity has been on an acquisition streak for some time. The bank has completed six merger or acquisition agreements in the past 18 months. Maybe this deal portends a busier 2nd half of the year, deal-wise, than the first? Certainly something Curtis and his team at Sheshunoff & Co. stand ready to support.

2. On Tuesday, the Fed held an open meeting to finalize “highly-anticipated rules” needed to implement Basel III’s capital requirements in the United States. Since its proposal last year, many executives from banks under $10Bn in asset size have expressed strong concerns with several aspects of the proposed rule. Now, the plan adopted on Tuesday will force all banks to hold more and higher quality capital. However, smaller banks will have a bit more leeway with their capital — which should allow them to take more risks than their larger competitors. While the Fed’s plan requires the nation’s largest banks to abide by stricter capital requirements than had been originally planned, mid-size and community banks appear to have received several breaks. Fed governors, according to the American Banker, said the final package offered an “appropriate sensitivity” in its treatment of smaller-sized financial institutions, “forgoing placing too much burden on firms while still strengthening overall capital standards.” If you want to dig deeper, this table from the Fed highlights those provisions most relevant to smaller, non-complex banking organizations and compares the new capital requirements to the current standards.

3. A lot of digital ink was spilled on Basel III this week; in my opinion, I think the ABA wrote it best: “the real test for Basel III is whether the rule makes it easier or more difficult for banks to serve their customers. If it makes it harder, that’s not what our still-recovering economy needs.” So on a much lighter note, the ICBA shared a top 50 “Community Bank Leaders in Social Media.” Based on fans/followers, engagement, content and frequency of posts, the small bank advocate lists the social media channels being put to use. All have a Facebook page; interestingly, not all have a Twitter account, few utilize YouTube and shockingly few employ LinkedIn (shh… don’t ask about Pintrest, Instagram or other social sites frequented by their young customers). Taking it a step further, they shared a top 20 “Community Banker Influencers on Twitter.” While I’m not sure how some qualified based on the number of followers and/or tweets, it is a good list of bankers if you’re looking to start or expand your twitter-verse.

Aloha Friday!