Acquire or Be Acquired Perspectives: Two Banking Megatrends to Watch For

April 27th, 2018

megatrends-4-27-18.png	Bronstein_Gary.pngThis is the fourth in a five-part series that examines the bank M&A market from the perspective of five attendees at Bank Director’s Acquire or Be Acquired conference, which occurred in late January at the Arizona Biltmore resort in Phoenix.

Read the perspectives of other industry leaders:
John Asbury, president and CEO of Union Bankshares
Eugene Ludwig, founder and CEO of Promontory Financial Group
Kirk Wycoff, managing partner of Patriot Financial Partners, L.P.


There were two industry trends at the forefront of attendees’ minds at the 2018 Acquire or Be Acquired conference hosted earlier this year by Bank Director at the Biltmore resort in Phoenix: the heating up of technology and the cooling down of M&A.

This was echoed in a conversation that Bank Director had at the conference with Gary Bronstein, a partner at Kilpatrick Townsend & Stockton LLP, who presented at the event and said that his biggest takeaways came from conversations about technology.

Bronstein is one of five perspectives Bank Director cultivated about M&A following its annual conference in late January.
The bank industry is no stranger to changes, many of which have led commentators and industry observers in the past to proclaim the death of traditional banks. Yet, there was a palatable sense among bankers in Phoenix that the evolution in technology happening right now could indeed be different.

“What does all of this actually mean?” asked Bronstein. “It’s pretty general at this point, but the demographics are changing. There’s a recognition that, once you get below a certain age range, people stop going into branches.”

The impact of this is starting to be reflected by trends in deposit growth. “I thought it was interesting to learn that, historically, the community banks typically increased their deposit bases by taking customers away from larger banks, but it appears that this trend has reversed itself,” says Bronstein. “The largest banks in the United States are now organically growing deposits even though they pay rates that are considerably lower than what community banks pay.”

Bronstein notes that brand recognition is one explanation for this. “When a young person moves to a new place and they need to open a bank account, they pick a bank with a household name,” says Bronstein. But he also believes that it could be driven by the ability of large banks to afford better technology that better appeals to younger generations.

One consequence is that banks should prioritize efforts to recruit directors with technology experience. “It’s important to have the right kind of expertise on your board,” says Bronstein. “Banks have been good about having accounting expertise on their board because, particularly for public companies, you are essentially required to have that for your audit committee. But I think equally as important today is technology expertise. It is important to make the effort to try to find it.”

Whether a bank is successful at recruiting the right expertise depends in part on location. “In rural areas this can be more difficult,” says Bronstein. “In urban areas or around urban areas, there are plenty of prospects with technology experience out there. It’s just a question of picking the right person.”

In addition to conversations about technology, Bronstein also noticed at the 2018 Acquire or Be Acquired conference that bankers seem more optimistic than at any time over the past decade. But interestingly, that optimism does not appear to be filtering through to M&A activity.

What’s causing this juxtaposition? There are few likely culprits, Bronstein notes.

The first is that there are not as many buyers in the market. “A theme at the conference was recognition on the part of people involved in bank M&A on a daily basis, including myself, that in many markets there is a limited number of buyers,” says Bronstein.

Underlying this is the perception that it is safer and simpler to grow organically. “There are some banks that have come to the conclusion that they do not want to be buyers,” says Bronstein. “They do not want to take on the risk. They do not want to do the work because it is not an effective use of their management capital.”

Another reason Bronstein offers for the underwhelming M&A market is that only a limited number of banks have currencies that are potent enough to make highly accretive acquisitions.

Many banks are trading for high multiples to their earnings, of course, but the problem is that much of the industry is in the same boat. This leaves few opportunities for banks with high valuations to realize earnings and book value accretion from the acquisition of banks with low valuations.

There’s also the simple matter of arithmetic. As the bank industry consolidates, with an average of 4 percent of banks disappearing by way of merger or acquisition each year, the number of prospective targets shrinks. And to Bronstein’s earlier point, this is a trend that is only likely to continue as community and regional banks seek the scale needed to compete against the technology offerings of the big banks.

jmaxfield

John J. Maxfield is the executive editor for Bank Director magazine.