As banks work to manage a challenging interest rate environment, gaining scale in fee-generating businesses can make a lot of sense. But doing so through acquisitions is as much an art as it is a science.
“You can’t overlook any warning signs in due diligence and get deal fever,” says Rick Childs, a partner at Crowe LLP. Unfortunately, too many banks pursue fee income without considering that the business might not be a good cultural match. Trying to fit a square peg in a round hole could result in added risk without adequate corresponding revenue.
The best strategic nonbank acquisitions examined by Bank Director feature buyers with existing expertise in the line of business they acquired. For these five, we examined the acquired business’ strategic impact on the organization, how effectively the bank has grown that area of the business and how significant the acquisition was, relative to its portfolio of loans, deposits or assets under management at the time of the acquisition. We also consulted bank analysts.
These deals are impactful because the organizations already focused on these business lines, and each acquisition helped these banks scale or broadened their capabilities in a specific area, says Childs.
The acquisition of Franklin American Mortgage Co., a national mortgage servicing and origination firm based in Franklin, Tennessee, topped our ranking and brought significant and immediate scale to the mortgage line at $162.7 billion asset Citizens Financial Group, based in Providence, Rhode Island. It tripled Citizens’ off-balance sheet mortgage servicing portfolio and doubled its origination platform, while also diversifying its mortgage business through the addition of correspondent and wholesale banking channels.
“It really gave them an important boost in their mortgage capabilities, and they bought it at the right time,” says Scott Siefers, principal, equity research at Sandler O’Neill + Partners. “It was a prescient buy, because they’ve been able to beef up that capability, rates have now fallen, and you’ve got a very robust mortgage environment, so Citizens can now play in that space in a way that they couldn’t before.”
Eric Schuppenhauer, the president of the home mortgage unit, explains that the acquisition helped Citizens build a mortgage line that will weather rate cycles.
“We’re building a franchise that’s built strong customer relationships, is able to flex when rates are low on the origination side and is able to scale in the right way when you hit a higher rate cycle,” says Schuppenhauer. “As you watch the mortgage industry unfold, we will be a real winner in this because we’re building key capabilities, we’re building digital capabilities, we’re making sure that our operations are efficient so we [can] compete effectively in the marketplace, and we have an incredible liquidity source, because we’re a bank.”
Citizens has continued to invest in its mortgage operations through a suite of digital tools unveiled in June 2019, including a digital mortgage platform and an online real estate portal.
But cultural similarities ultimately made the deal work, says Schuppenhauer, who describes the Franklin American culture and its approach to risk discipline as “very bank-like.”
Popular Inc., based in Hato Rey, Puerto Rico, scored second in the ranking with its well-timed transaction to gain significant scale in its auto finance unit through the acquisition of Reliable Financial Services, Wells Fargo & Co.’s auto finance unit in Puerto Rico. The deal, which closed in August 2018, added scale and took out the $52.5 billion asset bank’s biggest competitor in the space just as Puerto Rico’s auto market was heating up. “Right now, we’re seeing strong auto sales in Puerto Rico,” fueled in part by higher employment in the territory and the island’s “love affair with cars,” says Glen Manna, an equity analyst at Keefe, Bruyette & Woods. “[Reliable] was an absolutely fabulous franchise [that] combined the two largest auto finance units on the island … It was basically a home run.”
UMB Financial Corp., with $24 billion in assets, gained significant scale in the competitive health savings account (HSA) space through its acquisition of Wilmington, Delaware-based The Bancorp’s remaining HSA accounts. Healthcare comprises a growing percentage of U.S. GDP, so these deposits represent a “stable, core, inexpensive, fast-growing deposit base,” said CEO J. Mariner Kemper in an April 2018 earnings call. The third-ranked deal closed in June 2017, and the Kansas City, Missouri-based bank is now the fourth largest HSA bank in the U.S.
The nonbank acquisitions completed by $408.9 billion asset PNC Financial Services Group, based in Pittsburgh, and $171.1 billion asset Fifth Third Bancorp, based in Cincinnati, don’t significantly move the needle for these large institutions, but both advance strategic initiatives for the organizations.
PNC acquired Toronto-based ECN Capital Corp.’s U.S. commercial and vendor finance business in March 2017, including $1.1 billion in construction, transportation, industrial, franchise, and technology loans and leases. The deal, which placed fourth in our ranking, added to PNC’s existing vendor franchise.
Fifth Third Bancorp’s “Project North Star” initiative, announced in 2016, included a focus on strategic acquisitions that would enhance Fifth Third’s wealth management platform. Its acquisition of Retirement Corp. of America, which closed in April 2017, added talent and expertise to push this strategy forward. “We are committed to providing innovative solutions that help our clients prepare for retirement,” said Philip McHugh, head of regional banking, wealth and asset management, and business banking, in a January 2017 press release announcing the acquisition. “The Retirement Corp. of America’s mission to provide their clients with the opportunity to achieve financial independence during the non-working years of their life is a natural complement to Fifth Third.”
How They Ranked: Best Strategic Nonbank Acquisition
|ACQUIRER NAME, LOCATION / ASSET SIZE||TARGET||DEAL DATE||SCORE|
|1||Citizens Financial Group
Providence, RI / $164.3 billion
|Franklin American Mortgage Co.
|Aug. 1, 2018||1.50|
Hato Rey, PR / $52.5 billion
|Wells Fargo & Co.
Portion of auto finance business
|Aug. 1, 2018||1.88|
|3||UMB Financial Corp.
Kansas City, MO / $24.0 billion
Health savings accounts
|Jun. 23, 2017||3.38|
|4||PNC Financial Services Group
Pittsburgh, PA / $408.9 billion
|ECN Capital Corp.
Commercial & vendor finance
|Mar. 31, 2017||3.63|
|5||Fifth Third Bancorp
Cincinnati, OH / $171.1 billion
|Retirement Corp. of America
|Apr. 7, 2017||4.25|
SOURCES: S&P Global Market Intelligence, bank filings