Since consolidation in the banking industry accelerated in the mid-1980s, the number of mergers and acquisitions, as well as the rationale for those deals, has ebbed and flowed.
A decade ago, strong banks were gaining market share by buying fixer-uppers and partnering with the Federal Deposit Insurance Corp. to acquire failed institutions, big banks were trimming their branch networks by selling off locations to regional and community banks, and the fintech revolution was in its infancy.
A lot has changed since then.
Bank Director’s 2020 RankingBanking study, sponsored by Crowe LLP, examines an industry benefiting from the longest economic recovery in U.S. history. The priority for acquirers today isn’t purely scale, as it was in a previous era; instead it’s about gaining access to low-cost deposits, says Crowe Partner Kara Baldwin. Noticeably absent from the M&A market are the nation’s biggest banks, the three largest of which are legislatively prohibited from buying other banks, given that each of them already controls at least 10% of domestic deposits. One exception is the mega merger in 2019 between BB&T Corp. and SunTrust Banks to form Truist Financial, resulting in the sixth biggest commercial bank in the U.S. by assets.
These trends have fundamentally changed the industry’s competitive landscape. A little more than two decades ago, NationsBank and BankAmerica merged to create Bank of America Corp., the first coast-to-coast U.S. bank. The mantra at the time was that bigger is better. Today, the argument is more nuanced. Scale remains important to help offset higher regulatory and technology costs, but access to inexpensive and stable funding is equally important.
The latest iteration of Bank Director’s RankingBanking study looks at the best mergers and acquisitions in the banking industry completed between Jan. 1, 2017, and Jun. 30, 2018. The purpose is to tease out what made those deals so successful.
To do this, we evaluated deals across nine categories:
Bank Director chose the five top-performing deals per category using a pre-determined methodology. We then examined these deals a second time using a category-specific algorithm that included data from S&P Global Market Intelligence and the FDIC. We also incorporated qualitative information reflecting each bank’s strategic gains, informed by regulatory filings, press releases, news articles and input from bank analysts. For some categories, we even dug through each bank’s Facebook page to see how the deal resonated with customers.
The study focuses on deals from 2017 through the first half of 2018. This reduces the noise associated with closing and integration costs, and enables us to more accurately assess the longer-term impact of the transactions on the acquiring institutions. After all, as any successful acquirer will tell you, it’s over the long term that the value of a transaction is fully realized.
We made exceptions to the time frame for three categories. For nonbank and technology acquisitions — primarily bolt-on transactions with a smaller financial impact — we extended the period through the end of 2018. And for the broader M&A strategy category, we looked back to the beginning of 2016 to better identify serial acquirers.
The large bank and mid-sized bank categories share the same methodology. In each, the top five deals were chosen based on improvement to the buyer’s return on assets following the close of the acquisition. We only examined deals where the seller comprised at least 10% of the buyer’s assets at the time of the acquisition, to ensure they had a material impact on the acquirer. We then analyzed and ranked the top five deals based on profitability growth, efficiency improvement, credit quality improvement, growth in tangible book value per share and lending efficacy, based on each bank’s loan-to-deposit ratio one year post-acquisition. Bank Director also examined geographic expansion, acquired talent and other strategic factors.
The best large bank deal was $33.8 billion asset Valley National Bancorp’s acquisition of $4.7 billion asset USAmeriBancorp, a deal that expanded the Wayne, New Jersey-based bank’s Florida franchise, and greatly improved its profitability and efficiency metrics. Another Florida deal topped our mid-sized category: Winter Haven, Florida-based CenterState Bank Corp.’s purchase of $2.2 billion asset HCBF Holding Co. That deal scored highly due to the $17.4 billion asset bank’s profitability growth as well as gains in efficiency, credit quality and tangible book value.
The M&A market was particularly advantageous for acquirers in the $1 billion to $10 billion asset range in the periods examined for the study, says Rick Childs, a partner at Crowe LLP. “In general, the stock market in 2017 and the first half of 2018 was still very favorable for banks, and that impacted the price that was being paid for institutions, and the stock price of the buyer was impacting the ability to do transactions,” he says.
For the community bank category, we adjusted the metrics used in the analysis to reflect the availability of data for privately held institutions. The top five deals were again determined based on ROA growth, and we focused on deals where the seller comprised at least 10% of the buyer’s assets. We then analyzed and ranked the top five deals based on profitability growth, efficiency improvement and credit quality improvement; TBV growth and lending efficacy were not examined. We also factored in geographic expansion and talent gains.
Harlingen, Texas-based Texas State Bancshares topped the category with its acquisition of $185 million asset Blanco National Holdings, in a deal that gave the now $973 million asset bank a foothold in the Texas Hill Country around San Antonio. Texas State scored well for improving its profitability and efficiency metrics.
In examining the best mergers of equals, we focused on transactions involving publicly traded acquirers where the seller comprised 80% or more of the buyer’s assets. We focused on the same quantitative metrics included in our analysis of the best large and mid-sized bank deals, and we also examined cultural factors, as well as the combined entity’s geographic footprint and other strategic merits.
The Little Bank’s merger with Union Banc Corp., to create $788 million asset Union Bank, topped the list of the best mergers of equals. The deal doubled the Greenville, North Carolina-based bank’s footprint and rated highly for its financial performance following the deal’s close.
To determine the best deals based on market reaction, we analyzed the immediate impact on the acquirer’s stock price to select the five best performers, focusing on acquisitions where the seller comprised 25% or more of the buyer’s assets at closing. Stock price movement for the top five deals was then compared to a selection of indices.
The acquisition of $1 billion asset Sovereign Bancshares by Dallas-based Veritex Holdings, with $8 billion in assets, topped the market reaction category. It demonstrated the greatest one-day stock price improvement of the deals examined, at 11.93%.
To select the best branch network acquisitions, we looked at the number of branches and quantity of deposits gained in the deals. We then examined the average deposits per acquired location, and deposit growth at the acquired branches, noninterest expense improvement and the acquiring bank’s loan-to-deposit ratio one year after the deal closed. We also looked at how the deal affected the acquirer’s branch map.
Topping the category was an in-market deal that filled in the acquirer’s Utah footprint: the acquisition of seven Banner Corp. branches by $2.3 billion asset People’s Utah Bancorp, based in American Fork, Utah. Deposits grew by 7.8% at the acquired locations.
For the best technology acquisition category, Bank Director identified the five technology deals that best fulfill strategic goals at the acquiring bank. We then examined and ranked these acquisitions a second time based on their strategic impact, acquired talent and how the buyer continued to grow and develop the asset. The market for technology acquisitions is primarily dominated by large banks. A big regional bank, Cleveland-based KeyCorp, topped the ranking through its acquisition of the financial wellness platform HelloWallet. Focusing on financial wellness now forms the core of the bank’s retail strategy.
The best strategic nonbank acquisitions featured deals that expanded each bank’s reach and offerings in business lines that strategically fit the acquirer. We analyzed the significance of the acquisition and the acquired business line’s impact on the organization, including how effectively the bank has grown that area of the business.
The acquisition of Franklin American Mortgage Co. by Providence, Rhode Island-based Citizens Financial Group topped our ranking of nonbank acquisitions. The deal tripled Citizens’ off-balance sheet mortgage servicing portfolio and doubled its mortgage origination platform.
To identify the five banks with the best M&A strategy, we analyzed ROA, return on equity and share price appreciation as of the first quarter 2019. We then analyzed profitability growth from year-end 2015 through year-end 2018, based on earnings per share, ROAA and ROAE, as well as improvement in the bank’s tangible book value, efficiency ratio and credit quality. We also examined each bank’s loan-to-deposit ratio as of second quarter 2019 to gauge whether it was atypically high or low.
Two Florida acquirers rank No. 1 and No. 2 for their strategic approach to M&A: Seacoast Banking Corp. of Florida, based in Stuart with $6.9 billion in assets, and CenterState Bank Corp., which also had the best deal in the mid-sized bank category. Both exhibited high levels of profitability and TBV growth.
Finally, we have included the legal teams and investment bankers that worked behind the scenes on the winning deals in this report. “Relationships with advisors can assist in working through complications throughout the deal,” says Baldwin.
Looking ahead, there’s every reason to believe the M&A environment for the banking industry will continue to ebb and flow as it has done in the past. What changes will 2020 yield?
The Best Deals By Category
||WINNING ACQUIRER / TARGET
|BEST LARGE BANK DEAL
(Over $15 Billion)
|Valley National Bancorp / USAmeriBancorp
|BEST MID-SIZED BANK DEAL
($1 Billion – $15 Billion)
|CenterState Bank Corp. / HCBF Holding Co.
|BEST COMMUNITY BANK DEAL
(Under $1 Billion)
|Texas State Bankshares /Blanco National Holdings
|BEST MERGER OF EQUALS
||Union Bank / Union Banc Corp.
|BEST DEAL BY MARKET REACTION
||Veritex Holdings / Sovereign Bancshares
|BEST BRANCH NETWORK ACQUISITION
||People’s Utah Bancorp / Banner Corp.
|BEST TECHNOLOGY ACQUISITION
||KeyCorp / HelloWallet
|BEST STRATEGIC NONBANK ACQUISITION
||Citizens Financial Group / Franklin American Mortgage Co.
|BEST M&A STRATEGY
||Seacoast Banking Corp. of Florida