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.”
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.
Although its been said many times, many ways, I can’t tell you what size really matters in banking today. Pick a number… $500M in asset size? $1Bn? $9.9Bn? Over $50Bn? 7,000 institutions? 6,000? 3,000? Less? As a follow-up to last week’s guest post by Bank Director magazine’s editor, I spent some extra time thinking about where we are heading as an industry — and the size and types of banks + bankers leading the way. What follows are three things I’m thinking about to wrap up the week that shows that size matters; albeit, in different ways.
(1) Not a single de novo institution has been approved in more than two years (astonishing considering 144 were chartered in 2007 alone) and the banking industry is consolidating. Indeed, the number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer — falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the FDIC. Per the Wall Street Journal, the decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. I’ve written about how we are “over-capacity;” however, an article on Slate.com takes things to an entirely different level. In America’s Microbank Problem, Matthew Yglesias posits America has “far far far too many banks…. (that) are poorly managed… can’t be regulated… can’t compete.” He says we should want the US Bankcorps and PNCs and Fifth Thirds and BancWests of America to swallow up local franchises and expand their geographical footprints. He sees the ideal being “effective competition in which dozens rather than thousands of banks exist, and they all actually compete with each other on a national or regional basis rather than carving up turf.” While I have no problem with fewer banks, limiting competition to just the super regional and megabanks is a terrible thought. Heck, the CEO of Wells Fargo & Co. wrote in the American Banker this August how vital community banks are to the economy. So let me cite a rebuttal to Slate’s piece by American Banker’s Washington bureau chief Rob Blackwell. Rob, I’m 100% with you when you write “small banks’ alleged demise is something to resist, not cheer on” and feel compelled to re-share Mr. Stumpf’s opinion:
…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.
(2) To the consolidation side of things, a recent Bank Director M&A survey found 76% of respondents expect to see more bank deals in 2014. Within this merger mix exists strategic affiliations. While the term “merger of equals” is a misnomer, there are real benefits of a strategic partnership when two like-sized banks join forces. Case-in-point, the recent merger between Rockville Bank and United Bank (which will take the United name). Once completed, the institution will have about $5 billion in assets and be the 4th largest bank in the Springfield, MA and Hartford, CT metropolitan area. According to a piece authored by Jim Kinney in The Republican, United Bank’s $369 million merger with the parent of Connecticut’s Rockville Bank “is a ticket to the big leagues for both banks.” In my opinion, banks today have a responsibility to invest in their businesses so that they can offer the latest products and services while at the same time keep expenses in check to better weather this low interest rate environment. United Bank’s president-to-be echoed this sentiment. He shared their “dual mandate in the banking industry these days is to become more efficient, because it is a tough interest rate environment, and continue to grow… But it is hard to grow and save money because you have to spend money to make money.” Putting together two banks of similar financial size gives the combined entity a better chance to this end.
(3) In terms of growth — and by extension, innovation — I see new mobile offerings, like those from MoneyDesktop, adding real value to community banks nationwide. This Utah-based tech firm provides banks and credit unions with a personal financial management solution that integrates directly with online banking platforms. As they share, “account holders are changing. There is an ongoing shift away from traditional brick & mortar banking. Technology is providing better ways for account holders to interact with their money, and with financial institutions.” By working directly with online banking, core and payment platforms, MoneyDesktop positions institutions and payment providers as financial hubs and offers marketing tools that dramatically impact loan volume, user acquisition and wallet-share. As technology levels the playing field upon which institutions compete, banks that leverage account holder banking information to solidify relationships bodes well for bank and customer alike.
Last week, Lexington, Virginia… this week, San Francisco, California… next week, Chicago, Illinois. Yes, conference season is back and in full swing. I’m not looking for sympathy; heck, for the past few days, I’ve set up shop in Nob Hill (at the sublime Ritz-Carlton) to lead our Western Peer Exchange. Traveling like this, and spending time with a number of interesting CEOs, Chairmen, executives and board members, is why I love my job. What follows are three observations from my time here in NorCal that I’m excited to share.
(1) On Wednesday, I took a short drive up to San Mateo to learn more about Kony, a company that specializes in meeting multi-channel application needs. I have written about customer demands for “convenient” banking services in past posts — e.g. Know Thy Customer –and will not try to hide my interest in FinTech success stories. Learning how their retail banking unit works with financial institutions to deliver a “unified and personalized app experience” proved an inspiring start to my trip. Consequently, our Associate Publisher and I talked non-stop about the rapid evolution and adoption of technologies after we wrapped things up and drove back towards San Francisco. We agreed that consumer expectations, relative to how banks should be serving them, continues to challenge many strategically. To this end, Kony may be worth a look for those curious about opportunities inherent in today’s mobile technology. Indeed, their team will host a webinar that features our old friend Brett King to examine such possibilities.
(2) When it comes to banks, size matters. To wit, bigger banks benefit from their ability to spread fixed costs over a larger pool of earning assets. According to Steve Hovde, an investment banker and one of the sponsors of our event, “too big to fail banks have only gotten bigger.” He observed that the top 15 institutions have grown by nearly 55% over the past six years. Wells Fargo, in particular, has grown 199% since ’06. With more than 90% of the banking companies nationwide operating with assets of less than $1 billion, it is inevitable that consolidation will be concentrated at the community bank level. However, as yesterday’s conversations once again proved, size doesn’t always trump smarts. I said it yesterday and will write it again today. Our industry is no longer a big vs. small story; rather, it is a smart vs. stupid one.
(3) That said, “nobody has told banks in the northwestern U.S. that bank M&A is in the doldrums.” According to the American Banker, two deals were announced and another terminated after the markets closed Wednesday. Naturally, this should put pressure on banks in the region to keep buying each other. Here in San Francisco, the one being discussed was Heritage Financial’s combination with Washington Banking Co. According to The News Tribune, this is “very much a merger between equals, similar in size, culture and how each does business.” Now, the impetus behind ‘strategic affiliations’ (don’t call them mergers of equals) comes down to creating value through cost cuts and wringing out efficiencies. The thinking, at least during cocktails last night, was that deals like these happen to build value for the next few years in order to sell at higher multiples. Certainly, it will be interesting to see how this plays out. In a few months at our Acquire or Be Acquired conference, I anticipate it generating quite a few opinions.