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!

What Is Your Bank Worth

I’m at a 1909 Neoclassical landmark in San Francisco for Bank Director’s “Valuing the Bank” program.  Setting up shop in the beautiful Ritz-Carlton on Nob Hill is a real treat, as is welcoming a number of bank CEOs, chairmen, CFOs and outside directors to the Bay Area.  Let me share a few of my takeaways from yesterday’s conversations and tee up what’s ahead this morning.

The Ritz-Carlton San Francisco
The Ritz-Carlton San Francisco

What Drives Value Creation

To open the day, we reviewed the operating environment in terms of “what drives value creation.”  Beginning with a presentations made by the Hovde Group and Moss Adams, we touched on issues like margin compression, deposit funding, efficiency improvements and business model expansion in the context of the current environment.  One interesting, M&A-specific fact from this session: the market for high-performing banks is at a 5-year high.  Consider the number of deals greater than $25 million in deal value that were priced above 150% of tangible book value: in the last 4 quarters: 44… for the prior 18 quarters: 45.

Understanding Risk in the Context of Determining a Bank’s Worth

I made note that credit unions have seen loans grow 9.8% this past year; far quicker than the 4.9% growth at banks (h/t Hovde Group).  So as much as I’ve recently harped on non-bank competition from players like Apple and PayPal, a stark reminder that banks also need to find a way to compete with lower rates offered by credit unions to reverse this trend of losing loans.  Back to the M&A side of things, it was suggested that to maximize value, potential sellers should consider selling less profitable/smaller/rural branches.

Today’s Agenda

This morning, we will look at corporate governance and talent-specific opportunities to strengthen one’s institution.  After a series of peer exchanges, I am excited to tackle the idea that banks are sold more than they are bought.  Indeed, our final session of this program pairs David Brooks, the Chairman & CEO of  the NASDAQ-listed Independent Bank Group and Jim Stein, Vice Chairman & Houston Region CEO, Independent Bank.  Jim was the CEO at Bank of Houston and sold that bank to David’s, and together, will talk with me about how that deal was struck.

Aloha Friday!

Bank Mergers and Acquisitions

Before I head out to California to speak at Moss Adams’ annual Community Banking conference, a look at the principal growth strategy for banks: mergers and acquisitions.

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Over the last few years, bank advisers have made the case that consolidation should increase due to significant regulatory burdens, lack of growth in existing markets and aging boards and management teams that are “fatigued” and ready to exit our industry.  So as I see prices to acquire a bank on the rise, it is interesting to note that demand for a deal hasn’t slowed.  According to Raymond James, there were 136 acquisitions announced in the 1st half of the year versus 115 announced in the first half of 2013.  Moreover, total deal value is reported at $6.1 billion versus $4.6 billion in the first half of 2013.

Taking this a step further… While activity in the first quarter of 2014 was only slightly ahead of prior years, the second quarter saw a dramatic increase — 74 deals were announced, which is the highest of any quarter since the credit crisis of 2008.  According to this piece by Crowe Horwath (Will 2014 Be the Year of M&A?), annualized, the total number of announced transactions will exceed 260, which is on par with many of the pre-crisis years of the 2000s.

When is a “Deal Done Right?”

As competition to acquire attractive banks increases, so too does the short and long-term risks incurred by the board of an acquiring institution to find the right fits.  In many ways, the answer to “what makes a good buy” depends on the acquiring board’s intent.  For those looking to consolidate operations, efficiencies should provide immediate benefit and remain sustainable over time.  If the transaction dilutes tangible book value, investors expect that earn back within three to five years. However, some boards may want to transform their business (for instance, a private bank selling to a public bank) and those boards should consider more than just the immediate liquidity afforded shareholders and consider certain cultural issues that might swing a deal from OK to excellent.

My Thoughts on CIT’s Acquisition of OneWest

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. So as I consider this summer’s CIT deal for OneWest, I see a real shift happening in the environment for M&A.  I see larger regional banks becoming more active in traditional bank M&A following successful rounds of regulatory stress testing and capital reviews.  Also, it appears that buyers are increasingly eyeing deposits, not just assets.  This may be to prepare for an increase in loan demand and a need to position themselves for rising interest rates.

A “Delay of Game” Warning

While M&A activity levels are picking up in the bank space, the amount of time from announcement of acquisition to the closing of the deal has widened significantly in some cases.  As noted by Raymond James earlier this week, “this has been particularly notable for acquirers with assets greater than $10 billion where there have been notable delays in several instances given the greater regulatory scrutiny for banks above this threshold. M&T’s pending acquisition of Hudson City was originally expected to close in 2Q13, and through August 18, 2014, was 722 days from the original announcement on August 27, 2012. This case stands out as a prime example of issues surrounding Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance. A more recent example is the delay in the expected closing of BancorpSouth’s two pending acquisitions (Ouachita Bancshares and Central Community Corporation) that have both been pushed out due to similar issues.”

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When it comes to bank M&A, I sometimes feel like everyone has an opinion.  I’d be interested in your thoughts and welcome your feedback.  To leave a comment on this post, simply click on the white plus sign (within the grey circle at the bottom of this page).  I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me too.

Aloha Friday!

The Buying and Selling of Banks

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I think I know what’s around the bend…

As we wind down the dog days of summer, I re-read my last eight posts before outlining this week’s piece.  By design, I placed a heavier emphasis on stories that related to building customer relationships and opportunities tied to organic growth rather than multi-national issues and regulatory reform.  To build off these ideas, I thought to share three pieces that address “what’s next” in the United States and Europe.  The first focuses on potential changes overseas; the second, on domestic mergers and acquisitions; to close, I share the thoughts of Wells Fargo’s CEO on the importance of community banks.

(1) “What’s next for the restructuring of Europe’s banks,” a question that parallels many conversations taking place within boardrooms, think tanks, government offices and media rooms across the U.S.  Penned by members of the financial services team at McKinsey, this op-ed shows how Europe’s banks, like their U.S. counterparts, have had to re-evaluate their short and long-term prospects based on stagnant economic conditions.  Many “continue to face pressure from difficult funding conditions, a transition to higher costs of capital, changing regulations and tighter capital requirements.”  The authors make a case that many “need to shed capital-intensive operations and simplify businesses to compete more profitably in fewer market segments.”  All told, this report claims Europe’s banks are “considering the sale of up to 725 business lines across various business segments and geographies.”  If true, this might result in greater numbers of strategic mergers of like-sized banks.  Do you agree that this story sounds eerily familiar to the one playing out here in the States?

(2) Staying closer to home, bankers and advisers alike debate how quickly consolidation will play out in the coming years.  Personally, I see it taking place over a longer period than some might forecast.  To this point, I think I have a friend in Raymond James’ Anthony Polini (their Managing Director of Equity Research).  Anthony shared his perspectives with an audience of CEOs, Chairmen and board members at Bank Director’s Acquire or Be Acquired conference this January.  There, he opined that industry consolidation “is inevitable” as banks come to grips with new regulations, lower growth rates, higher capital/reserve requirements and lower long-term margins/returns.

Earlier this week, he penned a mid-year report that builds on those ideas.  He lays out how “the current slow growth environment fosters M&A as a quicker means for balance sheet growth and to achieve operating efficiencies in this revenue-challenged environment.”  In his team’s estimation, meaningful industry consolidation takes place over the next 5 to 10 years rather than a large wave that occurs over just a few.  This belies his belief that banks are “sold and not bought.”

Using this logic, coupled with an improving (albeit slowly) economy, modestly better asset quality and shades of loan growth, he believes “an M&A target’s view of franchise value will remain above that of potential acquirers. Put another way… expect the disconnect between buyers’ and sellers’ expectations to remain wide but slowly move closer to equilibrium over time.”

(3) Not to be lost amid this consolidation talk is a perspective from John Stumpf, the chairman and chief executive of Wells Fargo, as to why “Community Banks Are Vital to Our Way of Life.”  In his words

“…we need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy. “

He continues that “almost 95% of all U.S. banks are community banks. They provide nearly half of all small loans to U.S. businesses and farms. In one out of five U.S. counties, community banks are the only banking option for local residents and businesses. Many small towns… would have little access to banks, and the services they provide, without our system of community banks.”  Significant words from one of banking’s biggest voices.  Not the first time he’s shared this opinion, and hopefully, not the last.

Aloha Friday!

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