Bank M&A: Dead, Dying, or Becoming Something Different?

This week, I’ve worked with our team to put the finishing touches on Bank Director’s agenda for our 20th annual Acquire or Be Acquired Conference.  Widely regarded as the financial industry’s premier M&A event, the conference affectionately referred to as “AOBA” attracts bank CEOs, CFOs, Chairmen and outside directors from across the country to Arizona each January.  I keep hearing about the various drivers to doing a deal today — think economics, the burden of government regulation and increasing cost of capital.  As industry and economic headwinds challenge banks both large and small, I can think of no better perspective on what’s going on than that from my friend, colleague and Editor of Bank Director magazine, Jack Milligan.  While I typically share three of my thoughts on About That Ratio each Friday, Jack graciously agreed to author today’s column and share his.  Enjoy! 

Today's guest author, Jack Milligan
Today’s guest author, Jack Milligan

I have written about commercial banks since the mid-1980s and during that time have witnessed three banking crises (the thrift crisis in the late ‘80s soon followed by the commercial real estate crisis in the 1990s and, of course, the global financial crisis that occurred in 2007 and 2008), saw the U.S. Congress pass landmark banking legislation like the Gramm-Leach-Bliley Act of 1999 and Dodd-Frank Act of 2010, reflected upon the death of one regulatory agency (Office of Thrift Supervision) and birth of another (Consumer Financial Protection Bureau), and observed a parade of kings like Walt Wriston, Hugh McColl and Sandy Weill come and go.  But the most significant thing I’ve watched happen during all that time has been the industry’s profound consolidation into an hourglass distribution where a small number of very large banks control a significant majority of the nation’s deposits, and a very large number of very small banks fight for what’s left.

This trend of consolidation coincidentally also began in earnest in the 1980s – and in fact the first banking story I ever wrote was about (if memory serves) post-merger integration.  We just dipped below 7,000 banks in the United States (6,891 to be exact according to the FDIC), which seems like a good time to reflect on the question of how much more consolidation will occur.  We all know that bank merger activity has dropped precipitously since the global financial crisis, and we all know why.  In the maelstrom of the worst economic downturn since the Great Depression, in which the industry’s asset quality looked like it had been riddled by a machine gun, only a few large banks had the financial strength and appetite to acquire another institution, often with some form of government assistance.  Normal M&A was for all practical purposes dead.

Since the crisis has abated and the U.S. economy has gradually stabilized, some level of M&A has returned – but certainly not to pre-crisis levels.  Last year there were 129 healthy bank acquisitions for a total of $11.9 billion, and the deal total and aggregate dollar value for 2013 might be even lower.  In 2007 there were 235 bank deals for a total value of $71 billion.  But even those numbers pale in comparison to the halcyon days of late 1990s, when the average annual deal flow was twice that and aggregate values were in the hundreds of billions of dollars.  Many banks, buyers and sellers alike, have been waiting for the M&A market to kick back in – but to what?  To the 2007 level? Or to something closer to 1998, when there were 475 bank deals?  It is theoretically possible that the M&A market will never revive and the industry won’t consolidate much more than it already has.

In a recent piece in the American Banker, financial writer and researcher Harvey Winters reasons, correctly, that there are many small banks in rural locales like Nebraska that aren’t attractive takeover candidates and won’t ever be consolidated.  Winters says there might never be an M&A spring so-to-speak in such isolated and (from the perspective of an acquirer) unattractive markets.  The country’s very large banks that are still under the nationwide deposit cap and theoretically could grow larger through acquisitions are also being waved off by their regulators who today are much more concerned about the systemic risk that very large banks pose to the financial system than they were before the crisis.

In the good old days, large aggressive acquirers that were assembling nationwide banking franchises just as fast as they could helped drive the rest of the M&A market.  But those buyers are all gone, at least for now.  My own view is that bank M&A (and therefore consolidation) isn’t dead, but it is becoming something different.  I think we’ll see the rise of middle-market consolidators that have the capital and the skills to assemble their own intrastate, and later regional, franchises.

A perfect example is Richmond, Virginia-based Union First Market Bancshares’ recent acquisition of Charlottesville, Virginia-based StellarOne Corp.  Union First had $4 billion in assets and StellarOne $3 billion, and the combined $7-billion asset institution now bills itself as the largest community bank in Virginia — which is to say the largest bank that isn’t named Bank of America, Wells Fargo, etc.  The new First Union may continue to consolidate the Virginia market, or perhaps venture into neighboring Maryland or North Carolina, or maybe do all three.  If I am correct, we will eventually see the emergence of a new tier of banks in the $10 billion to $50 billion range that will consolidate attractive banking markets like Virginia and help drive consolidation into yet another phase.  There are many small banks that will never attract a buyer, and a handful mega-banks that will never do another acquisition, but that doesn’t mean that bank consolidation has reached a dead-end.

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Jack Milligan is the Editor of Bank Director magazine, a position to which he brings over 30 years of experience in financial journalism organizations.   Jack’s professional background includes stints as editor in chief of U.S. Banker, a leading magazine covering the banking industry; editor in chief at SNL Financial, a research and publishing company specializing in financial services; and general editor at Institutional Investor, a prominent financial magazine.  He’s on Twitter (@BankDirectorEd) and LinkedIn if you want to follow/connect with him.

Swimming without a bathing suit?

A full house in Chicago
A full house in Chicago

A busy week in Chicago… one highlighted by Bank Director’s annual Bank Audit Committee at the JW Marriott that kicked off on Wednesday morning and wrapped up about a few hours ago. For those that missed the event, today’s title comes from a conversation I had with the CEO of Fifth Third before he took the stage as our keynote speaker. Without going into too much detail, it refers to a line favored by our former publisher (and head of the FDIC) Bill Seidman. At conferences like this one, Bill was fond of saying when times are good, no one sees what is happening under water. But when things get tough and the tide goes out, well, you see who has been swimming without a bathing suit. In that spirit, what follows are three things I heard while hosting 350+ men and women, an audience representing 150 banks from 38 states.

(1) To kick off the conference, we invited the head of Hovde Financial to present on “Navigating Complex Financial, Strategic and Regulatory Challenges.” While we welcomed attendees from institutions as large as SunTrust, Fifth Third and KeyCorp, Steve Hovde’s presentation made clear that while larger banks like these continue to increase in size, many smaller community banks are fighting for survival in today’s regulatory and low-interest rate environment. Case-in-point, mobile banking technology is already in place at larger banks, fewer options are available to smaller banks to replace declining fee revenue (which could offset declines in net interest margins) and increased regulatory burdens favor large banks with economies of scale.

All of this suggests M&A should be hot and heavy. However, Steve pointed out that 2013 has not started out strong from a deal volume standpoint. In fact, only 59 deals were announced through April; annualized, this will result in significantly less deals than in 2012. Naturally, this leads many to think about building through more organic means.  To this end, he suggests that bank boards and management teams focus on questions like:

  • Is adequate organic growth even available today?
  • Are branches in urban markets more important than rural markets?
  • How much expense base would need to be added to fund the growth compared to the revenue generated by new loans?
  • Are we better off deepening penetration of existing markets or expanding physical premises into neighboring markets or both?
  • What steps can we take to enhance web and mobile platforms?

(2) In the spirit of asking questions like these, it strikes me that everyone has something to learn as we come through one of the deepest recessions in history. As businesses and regulatory agencies debate what could have been done differently, everyone is looking for an answer to avoid the next one, or at least, minimize its impact. Clearly, as directors and officers search for ways to manage future risks, they need to understand how to work together without impeding the organizations’ efficiency of operations while preparing for unexpected events.

Accordingly, we opened this morning with a session to explore this unique balance of corporate governance. The session included Bill Knibloe, a Partner at Crowe Horwath, Bill Hartmann, the Chief Risk Officer at KeyCorp and Ray Underwood, the Bank Risk Committee Chairman at Union Savings Bank. Together, they emphasized the need for both management and the board to understand current initiatives, future initiatives and various risks embedded in each to design plans for various oversight roles. For me, “plan to manage, not eliminate” stuck out in their comments.  If you were with us in Chicago, I wonder what was yours?

(3) Think about this: ­­­­­­­­­­­­­­it might be easier and safer today to rob banks with a computer than with a gun. While banks design their internal controls to help mitigate risk, our final session of the day looked at how an audit committee needs to properly address cyber risk as more and more attempt to attack an institution through the web. Here’s a link to a piece authored by our Managing Editor, Naomi Snyder, entitled Five questions to ask about cyber security; short, sweet and to the point. I hope to have more on this topic early next week as it kept the room full (I took the picture above just a few minutes before the close). Until next week…

Aloha Friday!