How to Respond to LendingClub’s Bank Buy

For me, the news that LendingClub Corp. agreed to purchase Radius Bancorp for $185 million was an “Uh oh” moment in the evolution of banking and fintechs.

The announcement was the second time I could recall where a fintech bought the bank, rather than the other way around (the first being Green Dot Corp. buying Bonneville Bank in 2011 for $15.7 million). For the most part, fintechs have been food for banks. Banks like BBVA USA Bancshares, JPMorgan Chase & Co and The Goldman Sachs Group have purchased emerging technology as a way to juice their innovation engines and incorporate them into their strategic roadmaps.

Some fintechs have tried graduating from banking-as-a-service providers like The Bancorp and Cross River Bank by applying for their own bank charters. Robinhood Markets, On Deck Capital, and Square have all struggled to apply for a charter. Varo is one of the rare examples where a fintech successfully acquired a charter, and it took them two attempts.

It shouldn’t be surprising that a publicly traded fintech like LendingClub just decided to buy the bank outright. But why does this acquisition matter to banks?

First off, if this deal receives regulatory approval within the company’s 12 to 15 month target, it could forge a new path for fintechs seeking more control over their banking future. It could also give community banks a new path for an exit.

Second, banks like Radius typically leverage technology that abstract the core away from key digital services. And deeper pockets from LendingClub could allow them to spend even more, which would create a community bank with a dynamic, robust way of delivering innovative features. Existing smaller banks may just fall further behind in their delivery of new digital services.

Third, large fintechs like LendingClub don’t have century-old divisions that don’t, or won’t, communicate with each other. Banks frequently have groups that don’t communicate or integrate at all; retail and wealth come to mind. As a result, companies like LendingClub can develop and deploy complementary banking services, whereas many banks’ offerings are limited by legacy systems and departments that don’t collaborate with each other.

The potential outcome of this deal and other bifurcations in the industry is a new breed of bank that is supercharged with core-abstracted technology and a host of innovative, complementary technology features. Challenger banks loaded with venture capital funds and superior economics via bank ownership could be potentially more aggressive, innovative and dangerous competitors to traditional banks.

How should banks respond?

Start by making sure that your bank has a digital channel provider that enables the relatively easy and cost-effective insertion of new third-party features. If your digital channel partner can’t do this, it’s time to draft a request for proposal.

Next, start identifying and speaking to the myriad of enterprise fintechs that effectively recreate the best features of the direct-to-consumer fintechs in a white-label form for banks. Focus on solutions that offer a demonstrable path to revenue retention, growth and clear cost savings — not just “cool” features.

After coming up with a plan, find a partner to help you market the new services either through  the third-party vendors you select or another marketing partner. Banks are notorious for not doing the best job of marketing new products and features to their clients. You can’t just build it and hope that new and existing customers will come.

Finally, leverage the assets you already have: physical branches, a mobile banking app that should be one of the top five on a user’s phone, and pricing advantage over fintechs. Most fintechs won’t be given long runways by their venture capital investors to lose money in order to acquire clients; at some point, they will have to start making money via pricing. Banks still have multiple ways to make money and should use that flexibility to squeeze their fintech competitors.

Change is the only constant in life — and that includes banking. And it has never been more relevant for banks that want to stay relevant in the face of rapidly developing technology and industry-shifting deals.

How Consolidation Changed Banking in Five Charts

Over the past 35 years, few secular trends have reshaped the U.S. banking industry more than consolidation. From over 18,000 banks in the mid-1980s, 5,300 remain today.

Consolidation has created some very large U.S. banks, including four that top $1 trillion in assets. The country’s largest bank, JPMorgan Chase & Co., has $2.7 trillion in assets.

Historically, very large banks have been less profitable on performance metrics like return on average assets (ROAA) and return on average tangible common equity (ROTCE) than smaller banks. The standard theory is that banks benefit from economies of scale as they grow until they reach a certain size, at which point diseconomies of scale begin to drag down their performance.

This might be changing, according to interesting data offered Keefe, Bruyette & Woods CEO Thomas Michaud in the opening presentation at Bank Director’s 2020 Acquire or Be Acquired conference. The rising profitability of large publicly traded banks and one of the underlying factors can be seen in five charts from Michaud’s presentation.

Profitability is High

Profitability
Banking has been highly profitable since the early 1990s — except, of course, for that big dip starting in 2006 when earnings nosedived during the financial crisis. The industry’s profitability reached a post-crisis high in the third quarter of 2018 when its ROAA hit 1.41%. Keep in mind, however, this chart looks at the entire industry and averages all 5,300 banks.

Banking 2016

Sweet Spot of Profitability
Banking is also highly differentiated by asset size: many very small institutions at the bottom of the stack,  four behemoths at the top. Michaud’s “sweet spot” in banking refers to a specific asset category that allows banks to maximize their profitability relative to other size categories. They have enough scale to be efficient but are still manageable enterprises. In 2016, this sweet spot was in the $5 billion to $10 billion asset category, where the banks’ pre-tax, pre-provision income was 2.32% of risk weighted assets.

Banking 2019

Sweet Spot Shifts
It’s a different story three years later. In 2019, the category of banks with $50 billion in assets and above captured the profitability sweet spot, with pre-tax, pre-provision income of 2.43% of risk weighted assets. What’s especially interesting about this shift is that, by my count, there are just 31 U.S. domiciled banks in this size category. (I excluded the U.S. subsidiaries of foreign banks, but included The Goldman Sachs Group and Morgan Stanley.) Of course, these 31 banks control an overwhelming percentage of the industry’s assets and deposits, so they wield disproportionate power to their actual numbers. But what I find most interesting is that as a group, the biggest banks are now the most profitable.

Big Banks

Big Bank Profitability
Even the behemoths have stepped up their game. You can see from the chart that KBW expects five of the six big banks — Bank of America Corp., JPMorgan, Wells Fargo & Co., Morgan Stanley and Goldman Sachs — to post ROTCEs of 12% or better for 2019. And some, like JPMorgan and Bank of America, are expected to perform significantly better. KBW expects this trend to continue through 2021, for the most part. What’s behind this improved performance? Buying back stock is one explanation. For example, between 2017 and 2021, KBW expects Bank of America to have repurchased 27.6% of its outstanding stock at 2017 levels. But there is more to the story than that.

bank share

Taking Market Share
The 20 largest U.S. banks have aggressively grown their national deposit market share – a trend that seems to be accelerating. Beginning during the financial crisis in 2008, the top 20 began gaining market share at a faster rate than the rest of the industry. The differential continues to widen through at least the third quarter of last year. But the financial crisis ended over a decade ago, so a flight to safety can no longer explain this trend. Something else is clearly going on.

Consumers across the board are increasingly doing their banking through digital channels. Digital banking requires a significant investment in technology, and this is where the biggest banks have a clear advantage. Digital has essentially aggregated local deposit markets into a single national deposit market, and the largest banks’ ability to tap this market through technology gives them a significant competitive advantage that is beginning to drive their profitability.

Having too much scale was once a disadvantage in terms of performance — that may no longer be the case. Banking increasingly is becoming a technology-driven business and the ability to fund ambitious innovation programs is quickly becoming table stakes.

The Measure of a “Good” Deal

What makes a good bank deal? Depends on who you ask.

Mergers and acquisitions are a vital strategic undertaking for banks, and consolidation trends continue to shape the industry. To that end, I asked four presenters speaking at Bank Director’s 2020 Acquire or Be Acquired Conference the same question: “What is the most important metric of a bank deal? And what is the most important thing that can’t be measured?”

The response of the interviewees — a community bank CEO, two attorneys and an investment banker — were kept secret from each other. Their unique and varied responses belie their perspectives and experiences when it comes to bank M&A, and hopefully can shed some light on how others in the industry think about, and measure, a “good” deal.

Before Announcement
For Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. Investment Banking, the most important criteria to getting a good deal done comes down to location. “Geography is the most reliable characteristic to getting the deal done in today’s market. Where a bank is located is driving deals more than ever,” he says.

He points out that institutions in high-growth areas have a “high probability” of commanding a strong price, whereas a robust, profitable bank in a rural area with declining demographics may be challenged to get a deal done at a reasonable valuation.

For buyers, coming up with a reasonable purchase price and accurately assessing a seller’s asset quality are the most important elements in a good deal, says Bob Monroe, a partner at Stinson LLP.

“If you buy a bunch of junk, you’re going to get a bunch of junk, and you generally won’t have a successful deal,” he quips.

To account for the uncertain performance of acquired loans, Monroe says buyers will either not acquire certain assets or set up an escrow account that is equal to the present value of the assets in question so they can get worked out.

Frank Sorrentino III, chairman and CEO of ConnectOne Bancorp in Englewood Cliffs, New Jersey, says it was difficult to try to nail down an answer, even though “I knew what the question was going to be.”

Sorrentino has guided the $6.2 billion bank through three deals since 2014, and initially felt that a good deal can be measured by the market’s response. But he says the market might pan some deals that it doesn’t “fully digest or understand” because the deal may not generate immediate value at announcement.

For Sorrentino, good deals are ones that provide better internal opportunities for the pro forma bank and create additional value.

“I don’t care which metric you use, I don’t care what spreadsheet you use for your modeling — at the end of the day, are you creating more value? There are various components to values: some are financial, some are nonfinancial, but I think it really comes down to value,” he says. “Are you adding 1 and 1 and getting something north of 2?”

At, and After, Announcement
During Day 1 of the conference, Keefe, Bruyette & Woods President and CEO Tom Michaud highlighted that the premium that acquirers have offered sellers has declined since 2010. Part of that decline has come from a decline in potential buyers, but he added that investor concern around the pro forma company’s earnings per share and tangible book value growth has imposed discipline on deals.

One metric that Carpenter says can indicate a good deal is the performance of the buyer’s stock after the merger is announced, relative to the valuation the seller received.

The most measurable tangible metric for grading the success of a bank sale would be price to tangible book value, and then how that stock performs in the 12 months after announcement,” he says. This is especially important for prospective sellers that would consider a merger that includes stock.

Peter Weinstock, a partner at Hunton Andrews Kurth, extends this to the second full year after a merger is consummated. Weinstock wrote in an email that the most important metric is the pro forma bank’s earnings per share accretion in that second year.

“While tangible book value earn-back is much ballyhooed — and has lately been a metric that has led to some good deals not being done — the true success of the deal is measured in what it does for the acquirer’s profitability once the majority of cost savings and synergies are achieved,” he wrote.

Sorrentino cautions that value creation doesn’t always carry a time stamp, and that bankers should resist short-term thinking or relying solely on metrics when assessing the value of a company or a deal.

“Sometimes the value is not necessarily created on financial terms. There could be value created [in a deal] because of talent, or because of the business lines you’re taking on,” Sorrentino says, adding that technological capabilities, efficiencies and cultural elements can also be acquired in a deal. “Everyone wants to look at the EPS accretion at announcement or tangible book value dilution. It may not be that simple.”

After Close
There is some agreement as to the most important unmeasurable aspect of a good deal. The consensus coalesces around integration and the cultural fit of the two banks. Buyers must manage the deal integration in a way that incentivizes and excites the seller’s employees, lest they look for other opportunities.

“Being able to fit your culture in with the seller’s culture is extremely important, because otherwise you’ll have a flat tire running down the road,” Monroe says. “It won’t be smooth.”

Adding to that, Weinstock wrote that the buyer’s “willing[ness] to spend the leadership time, devote the financial resources and risk overcommunicating” in order to integrate the banks’ operations, vision and culture is the most important immeasurable metric of a good deal.

For sellers, the hardest thing for banks to measure in a deal is how it will affect their employees, Carpenter says. Executives at selling banks often hope that a deal only furthers the opportunities and careers of its employees, as well as benefits the selling bank’s community. One way prospective buyers can help sellers with this concern is by putting the prospective seller in touch with former CEOs of previously acquired banks.

“More often than not in this environment, [deals] really come down to one buyer courting a seller, or you’ve reduced the number of bidders down. The seller is wondering ‘Is this a good deal? Can we trust this guy?’” Carpenter says. “The buyer can offer up, ‘Here’s two people that ran banks we bought, call them and asked them how it went.’”

Michaud says banks considering engaging in M&A should “start at the end,” identifying what they want a deal to achieve.

“It needs to be all of these things to work: well-priced, strategic merit and be logical, earn-back that fits within the barrier. It can’t be complex and have a lot of noise, it must be accretive or investors will want to know why you did it, and it needs to be well-structured too so everyone stays in their seat and is there to execute,” he says. “If you do all of these things, you can create a lot of shareholder value.”

Industry Perspectives at Acquire or Be Acquired 2020

People, Products & Performance – In this interview with Bank Director CEO Al Dominick, John Eggemeyer shares his thoughts on what drives performance.
Super-Connected Customers – Data, payments and other technology-related issues were top of mind for bankers at the 2020 Acquire or Be Acquired conference.
Who Gets the Dog? – On the heels of the CenterState Bank Corp./South State Corp. merger, Al Dominick evaluates a core cultural issue around these deals.
Spotlight on M&A – Drivers of M&A, balancing organic growth with acquisitions, and nonbank deals were key topics discussed from the stage at Acquire or Be Acquired.
Exploring Opportunities – Bank Director CEO Al Dominick shares three important takeaways from the first day of the 2020 Acquire or Be Acquired conference.
Technology’s Impact – Hear how banking industry leaders view today’s quickly evolving technology landscape.
Focus on Consolidation – Big mergers of equals and tech deals defined the banking market in 2019.

On the Docket of the Biggest Week in Banking

Think back to your days as a student. Who was the teacher that most inspired you? Was it because they challenged your assumptions while also building your confidence?

In a sense, the 1,312 men and women joining me at the Arizona Biltmore in Phoenix for this year’s Acquire or Be Acquired Conference are in for a similar experience, albeit one grounded in practical business strategies as opposed to esoteric academic ideas.

Some of the biggest names in the business, from the most prestigious institutions, will join us over three days to share their thoughts and strategies on a diverse variety of topics — from lending trends to deposit gathering to the competitive environment. They will talk about regulation, technology and building franchise value. And our panelists will explore not just what’s going on now, but what’s likely to come next in the banking industry.

Mergers and acquisitions will take center stage as well. The banking industry has been consolidating for four decades. The number of commercial banks peaked in 1984, at 14,507. It has fallen every year since then, even as the trend toward consolidation continues. To this end, the volume of bank M&A in 2019 increased 5% compared to 2018. 

The merger of equals between BB&T Corp. and SunTrust Banks, to form Truist Financial Corp., was the biggest and most-discussed deal in a decade. But other deals are worth noting too, including marquee combinations within the financial technology space.

In July, Fidelity National Information Services, or FIS, completed its $35 billion acquisition of Worldpay, a massive payment processor. “Scale matters in our rapidly changing industry,” said FIS Chairman and Chief Executive Officer Gary Norcross at the time. Fittingly, Norcross will share the stage with Fifth Third Bancorp Chairman and CEO Greg Carmichael on Day 1 of Acquire or Be Acquired. More recently, Visa announced that it will pay $5 billion to acquire Plaid, which develops application programming interfaces that make it easier for customers and institutions to connect and share data.

Looking back on 2019, the operating environment proved challenging for banks. They’re still basking in the glow of the recent tax breaks, yet they’re fighting against the headwinds of stubbornly low interest rates, elevated compliance costs and stiff competition in the lending markets. Accordingly, I anticipate an increase in M&A activity given these factors, along with stock prices remaining strong and the biggest banks continuing to use their scale to increase efficiency and bolster their product sets.

Beyond these topics, here are three additional issues that I intend to discuss on the first day of the conference:

1. How Saturated Are Banking Services?
This past year, Apple, Google and Facebook announced their entry into financial services. Concomitantly, fintechs like Acorns, Betterment and Dave plan to or have already launched checking accounts, while gig-economy stalwarts Uber Technologies and Lyft added banking features to their service offerings. Given this growing saturation in banking services, we will talk about how regional and local banks are working to boost deposits, build brands and better utilize data.

2. Who Are the Gatekeepers of Customer Relationships?
Looking beyond the news of Alphabet’s Google’s checking account or Apple’s now-ubiquitous credit card, we see a reframing of banking by mainstream technology titans. This is a key trend that should concern bank executives —namely, technology companies becoming the gatekeepers for access to basic banking services over time.

3. Why a Clear Digital Strategy Is an Absolute Must
Customer acquisition and retention through digital channels in a world full of mobile apps is the future of financial services. In the U.S., there are over 10,000 banks and credit unions competing against each other, along with hundreds of well-funded start-ups, for customer loyalty. Clearly, having a defined digital strategy is a must.

For those joining us at the Arizona Biltmore, you’re in for an invaluable experience. It’s a chance to network with your peers and hear from the leaders of  innovative and elite institutions.

Can’t make it? We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA20.

Bank M&A: Setting Expectations for 2020

What’s driving bank M&A today? That’s one of the questions explored in Bank Director’s 2020 Bank M&A Survey, sponsored by Crowe LLP. In this video, Crowe Partner Rick Childs explains how M&A drivers and barriers will impact deal activity in 2020. He also weighs in on how to effectively measure the success of a transaction and shares the important role strategic discipline plays in achieving long-term success.

  • Pricing Expectations
  • Defining a Successful Deal
  • Predictions for 2020

In accordance with applicable professional standards, some firm services may not be available to attest clients. © 2020 Crowe LLP, an independent member of Crowe Global.   crowehorwath.com/disclosure

Tackling M&A as a Board

Success in executing a bank’s growth strategy — from acquiring another institution to even selling the bank — begins with the discussions that should take place in the boardroom. But few — just 31%, according to Bank Director’s 2020 Bank M&A Survey — discuss these issues at least quarterly as a regular part of the board’s agenda.

Boards have a fiduciary duty to act in the best decisions of shareholders, and these discussions are vital to the bank’s overall strategy and future. Even if management drives the process, directors must deliberate these issues, whether it’s the prospective purchase or another entity of selling the bank.

The survey affirms the factors driving M&A activity today: deposits, increased profitability and growth, and the pursuit of scale. There are common barriers, as well; price in particular has long been a sticking point for buyers and sellers.

M&A plays an important role in most banks’ strategies. One-quarter intend to be active acquirers, and 60% prefer to focus on organic growth while remaining open to making an acquisition.

However, roughly 4% of banks are acquired annually — a figure that doesn’t line up with the 44% of survey respondents who believe their bank will acquire another institution this year.

Conversations in the boardroom, and the strategy set by the board, will ultimately lead to success in a competitive deal landscape.

“Having strong, frequent communications with the board is very much part of our M&A process, and I can’t emphasize how important it is,” says Alberto Paracchini, CEO at Chicago-based Byline Bancorp. The $5.4 billion asset bank has closed three deals in the past five years. “With proper communication, good transparency and frequent communication as to where the transaction stands, the board is and can be not only a great advisor but a good check on management.”

The board at Nashville, Tennessee-based FB Financial Corp. discusses M&A as part of its annual strategic planning meeting. Typically, an outside advisor talks to the board at that time about the industry and provides an outlook on M&A. Also, they’ll “talk about our bank and how we fit into that from their perspective,” including potential opportunities the advisor sees for the organization, says Christopher Holmes, CEO of the $6.1 billion asset bank. Progress on the strategy is discussed in every board meeting; that includes M&A.

So, what should directors discuss? Overall, survey respondents say their board focuses on markets where they’d like to grow (69%), deal pricing (60%), the size of deals their bank can afford (57%) and/or specific targets (54%).

“It starts with defining what your acquisition strategy is,” says Rick Childs, a partner at Crowe LLP. Identifying attractive markets and the size of the target the bank is comfortable integrating is a good place to start.

At $6.1 billion asset Midland States Bancorp, strategic discussions around M&A center around defining the attributes the board seeks in a deal. Annually, directors at the Effingham, Illinois-based bank discuss “what do we like in M&A — deposits and wealth management and market share,” says CEO Jeffrey Ludwig. “[We] continue to define what those types of items are, what the marketplace looks like, where’s pricing today.”

Given the more than 400 charters in Illinois, the board sees ample opportunity to acquire, and the board evaluates potential deals regularly. The framework provided by the board ensures management focuses on opportunities that meet the bank’s overall strategy.

The board at $13.7 billion asset Glacier Bancorp, based in Kalispell, Montana, is “very involved in M&A,” says CEO Randall Chesler. Management shares with the board which potential targets they’re having conversations with and how these could fuel the bank’s strategy. “We start to show them financial modeling early on [so] that they can start to understand what a transaction might look like,” he says. “They’re really engaged early on, through the process and afterwards.” Once a transaction goes through, the board keeps tabs on the status of the conversion and integration.

Having M&A experience on the board can aid these discussions. Overall, 78% of respondents say their board includes at least one director with an M&A background.

These directors can help explain M&A to other board members and challenge management when necessary, says Childs. “They can be a really valuable member of the team and add their experience to the overall process to make sure that it isn’t all groupthink; that there’s somebody that can challenge the process, and make sure [they’re] asking the right questions and keeping everybody focused on what the impact is.”

A number of banks don’t plan to acquire via acquisition. How often should these boards discuss M&A? More than half of survey respondents who say their bank is unlikely to acquire reveal that their board discusses M&A infrequently; another 20% only discuss M&A annually.

Jamie Cox, the board chair at $265 million asset Alamosa State Bank, based in Alamosa, Colorado, says her bank strongly prefers organic growth. Still, the board discusses M&A quarterly at a minimum. “We would be remiss if we ignored it completely, because opportunity is always out there, but you’ve got to be looking for it,” she says. “Whether it’s your key strategy or a secondary strategy, it’s always got to be on the table.”

In charter-rich Wisconsin, Mike Daniels believes too many community bank boards aren’t adequately weighing whether now’s the time to sell. “I don’t want to be as bold as to say that they’re not doing their fiduciary responsibility to their shareholders, but are they really looking at what their strategic options are?” says Daniels, executive vice president at $3.1 billion asset Nicolet Bancshares and CEO of its subsidiary, Nicolet National Bank.

Green Bay, Wisconsin-based Nicolet has an investment banker on staff who can model the financial results for potential acquisition targets. “We’re having M&A dialogue on a regular basis at the board level because we can do this modeling — here’s who we’re talking to, here’s what we’re talking about, here’s what it would mean,” says Daniels.

The board sets the direction for what the bank should evaluate as a potential target. How success is measured should derive from those initial discussions in the boardroom.

“We’re real disciplined on that tangible book value earnback and making sure there’s enough earnings accretion,” says Ludwig. A deal isn’t worth the effort if earnings per share accretion is less than 2% in his view. Any cost saves or revenue synergies are factored into the bank’s earnback estimate. “We’re fairly conservative on the expense saves and diligent about getting at least what we’ve disclosed we could get, and we don’t put any revenue synergies in our model.”

Bank Director’s 2020 Bank M&A Survey, sponsored by Crowe, surveyed more than 200 independent directors, CEOs and senior executives to examine acquisition and growth trends. The survey was conducted in August and September 2019. Bank Director’s 2020 RankingBanking study, also sponsored by Crowe, examines the best M&A deals completed between Jan. 1, 2017, and Jun. 30, 2018, detailing what made those deals successful. Additional context around some of these top dealmakers can be found in the article “What Top Acquirers Know.” The Online Training Series also includes a unit on M&A Basics.

Keeping Benefits Simple During M&A

Mergers and acquisitions are an attractive growth strategy for many banks, but deals are increasingly and needlessly complicated by existing employee benefit plans.

The United States entered the longest economic expansion in history during the third quarter of 2019, surpassing the 120-month run between March 1991 to March 2001. There have been parallels of economic events and potential perils between then and now: a strong housing market, corporate tax cuts, low interest rates, and a mergers and acquisitions environment that rivals the 1990s, resulting in a loss of more than 4% of the nation’s banks per annum on average. From March 1991 to today, the number of U.S. banks has decreased by over 60%. The industry is not only used to M&A but expects it.

But in recent years, we’ve seen a growing burden and complexity in navigating through bank M&A deals, in part due to existing nonqualified benefit plans and bank-owned life insurance, or BOLI, programs. Burdens include heightened regulations on allowable plan designs, evolving tax laws and stricter compliance and due diligence requirements.

Now more than ever, it has become increasingly likely that BOLI or nonqualified benefit plans will be involved in a transaction, and odds are that the acquired portfolio and plans were part of a previous deal.

About 64% of banks across the country owned BOLI at the end of 2018, according to data from S&P Global Market Intelligence, including 63% of banks under $2.5 billion in total assets, 82% of banks between $2.5 billion and $35 billion, and 64% of banks over $35 billion.

The BOLI market continues to expand as banks continue to consolidate, and new premium sales have averaged over $3.5 billion annually in the past five years. Additionally, approximately 65% of banks have a nonqualified benefit plan, split-dollar life insurance plan or both, based on records of Newcleus’ 750 clients.

Program sponsorship continues to expand, because BOLI and nonqualified benefits continue to be important programs for institutions. Implementing nonqualified benefit plans can serve as a valuable resource for banks looking to attract and retain key talent. Both selling and acquiring institutions need to understand the mechanics of benefit and BOLI programs in order to avoid inaccurate plan administration and mismanagement following a combination. This includes:

Non-Qualified Benefit Plans

  • Reviewing the plan agreement: Complete a thorough analysis of the established plan agreements. Understand all triggering events for benefits, available options to exit the plan and the agreement’s change-in-control language.
  • Accounting implications: The bank, in partnership with their plan administrator, should properly vet the mechanics and assumptions used in existing plan accounting. For example, change-in-control benefits could specify a discount rate that must be used for benefit payments, which may differ from rates used on existing accounting reports. They should also ensure that all plan benefits deemed de minimis have been accounted for, such as small split-dollar plans.
  • 280G: Complete a 280G analysis to understand the possible implications of excess parachute payments, including limitations (i.e. net best benefit provisions) caused by existing employee agreements and related non-compete provisions.

BOLI Programs

  • Insurance carrier due diligence: Bankers should complete a thorough review to ensure that acquired BOLI meets the holding requirement that is outlined by the bank’s existing BOLI investment policy, if applicable.
  • Active/inactive BOLI population: As the insured and surviving owner relationship becomes more separated, it is paramount that executives maintain detailed census information, including Social Security numbers, for mortality and insurable interest purposes.
  • Policy ownership: Many banks have implemented trusts to act as the owner of certain BOLI policies. While this setup is permissible, changes in control can impact a trust’s revocability. Institutions should review this information prior to closing, given that there may be limited options to directly manage those policies post-deal close.

These programs are not in the executives’ everyday purview, nor should they be. That’s why it’s so important for institutions to establish partnerships that help guide them through the analysis, documentation and due diligence process for BOLI and nonqualified benefit plans.

Banks may want to consider working with external advisors to conduct a thorough review of existing programs and examine all plan details. They may also want to consider administrative systems, like Newcleus MINTS, that streamline reporting and compliance requirements. Taking these steps can help reduce unnecessary headaches, and create a solid foundation for future BOLI purchases and new nonqualified benefit plans.

Why Some Banks Purposefully Shun the Spotlight


strategy-8-9-19.pngFor as many banks that would love to be acquired, even more prefer to remain independent. Some within the second group have even taken steps to reduce their allure as acquisition targets.

I was reminded of this recently when I met with an executive at a mid-sized privately held community bank. We talked for a couple hours and then had lunch.

Ordinarily, I would go home after a conversation like that and write about the bank. In fact, that’s the expectation of most bank executives: If they’re going to give someone like me so much of their time, they expect something in return.

Most bank executives would welcome this type of attention as free advertising. It’s also a way to showcase a bank’s accomplishments to peers throughout the industry.

In this particular case, there was a lot to highlight. This is a well-run bank with talented executives, a unique culture, a growing balance sheet and a history of sound risk management.

But the executive specifically asked me not to write anything that could be used to identify the bank. The CEO and board believe that media attention — even if it’s laudatory — would serve as an invitation for unwanted offers to acquire the bank.

This bank in particular has a loan-to-deposit ratio that’s well below the average for its peer group. An acquiring bank could see that as a gold mine of liquidity that could be more profitably employed.

Because the board of this bank has no interest in selling, it also has no interest in fielding sufficiently lucrative offers that would make it hard for them to say “no.” This is why they avoid any unnecessary media exposure — thus the vague description.

This has come up for me on more than one occasion in the past few months. In each case, the bank executives aren’t worried about negative attention; it’s positive attention that worries them most.

The concern seems to stem from deeper, philosophical thoughts on banking.

In the case of the bank I recently visited, its executives and directors prioritize the bank’s customers over the other constituencies it serves. After that comes the bank’s communities, employees and regulators. Its shareholders, the biggest of which sit on the board, come last.

This is reflected in the bank’s loan-to-deposit ratio. If the bank focused on maximizing profits, it would lend out a larger share of deposits. But it wants to have liquidity when its customers and communities need it most – in times when credit is scarce.

Reading between the lines reveals an interesting way to gauge how a bank prioritizes between its customers and shareholders. One prioritization isn’t necessarily better than the other, as both constituencies must be appeased, but it’s indicative of an executive team’s philosophical approach to banking.

There are, of course, other ways to fend off unwanted acquisition attempts.

One is to run a highly efficient operation. That’s what Washington Federal does, as I wrote about in the latest issue of Bank Director magazine. In the two decades leading up to the financial crisis, it spent less than 20% of its revenue on expenses.

This may seem like it would make Washington Federal an attractive partner, given that efficiency tends to translate into profitability. From the perspective of a savvy acquirer, however, it means there are fewer cost saves that can be taken out to earn back any dilution.

Another way is to simply maintain a high concentration of ownership within the hands of a few shareholders. If a bank is closely held, the only way for it to sell is if its leading shareholders agree to do so. Widely dispersed ownership, on the other hand, can invite activists and proxy battles, bringing pressure to bear on the bank’s board of directors.

Other strategies are contractual in nature. “Poison pills” were in vogue during the hostile takeover frenzy of the 1980s. Change-of-control agreements for executives are another common approach. But neither of these are particularly savory ways to defend against unwanted acquisition offers. They’re a last line of defense; a shortcut in the face of a fait accompli.

Consequently, keeping a low media profile is one way that some top-performing banks choose to fend unwanted acquisition offers off at the proverbial pass.

While being acquired is certainly an attractive exit strategy for many banks, it isn’t for everyone. And for those banks that have earned their independence, there are things they can do to help sustain it.

2019 Mid-Year Bank M&A Outlook


merger-8-5-19.pngWhat might the second half of 2019 bring for bank mergers and acquisitions (M&A)?

The favorable drivers in the first half of 2019 — the regulatory landscape, enhanced earnings as a result of tax reform, desire for scale and efficiency, and the search for digital capabilities — will likely continue to be the catalysts for bank M&A activity in the second half of 2019. While the market has not seen a spike in the bank M&A deal volume, overall deal values continue to rise because of a few large transactions, including mergers with price tags of a $28 billion and a $3.6 billion. The following trends and drivers are expected to continue to have an impact on banking M&A activity in the second half of 2019 and beyond.

Intensifying Battle for Secured Customer Deposit Bases
U.S. banks’ deposit costs rose far more quickly than loan yields in the first quarter of 2019; further increases in deposit costs may prevent net interest margins from expanding in 2019. As the competition for deposits intensifies, buyers are increasingly looking for banks with a secured deposit base, especially those with a significant percentage. Moreover, as deposit betas accelerate — even as the Federal Open Market Committee slows rate hikes — it becomes more difficult for banks to grow deposits.

With the largest banks attempting to grow their deposit market share via organic customer growth, the regional and super regional banks are trying to develop similar presences through acquisitions. Banks that can navigate this rate environment ably should emerge as better-positioned acquirers via their stock currency, or sellers through the attractiveness of their funding base.

Favorable Regulatory Environment
Dodd-Frank regulations have eased over the past 12 months, increasing the threshold for added oversight and scrutiny from $50 billion in assets to $250 billion. Easing bank regulations and tax reforms that create surplus capital could continue driving regional and super regional consolidation. Moreover, banks with $250 billion to $700 billion in assets may continue to benefit in the second half of 2019 from a more-favorable regulatory landscape.

MOE’s Potential Change on the Competitive Landscape
There were a couple of mergers of equals (MOE) in the first half of 2019 that were welcomed by investors — an indication that the industry could be likely to see a rise in the volume of larger transactions in 2019. Regional banks that miss the MOE wave in the near term may soon find themselves without a “partner” after the initial wave of acquisitions occurs.

As the banks pressure-test their MOE strategy, the key may be to find a partner with strategic overlap to drive the synergies and justify the purchase price premium yet also provide an opportunity for growth and geographic footprint. Furthermore, unlike smaller tuck-ins, MOE requires additional strategic diligence and capabilities. This includes the ability to successfully integrate and scale capabilities, the ability to cross-sell to newly acquired segments, the ability to consolidate branches in overlapping markets and integrating divergent management processes and culture.

The Hunt for Digital Capabilities
Evolving consumer wants and the table stake needed to provide an integrated digital ecosystem are compelling many bank executives to differentiate themselves via technology and digital channels growth. Investors typically place a premium on digital-forward banks, driving up multiples for banks with efficient ecosystems of digital capabilities. The hunt for digital capabilities may provide an opportunity to not only add scale, but also transform legacy banks into agile, digital-first banks of the future.

Bank boards and executives should remain cognizant of above trends as they progress through their strategic M&A planning. Their resulting decisions — to be buyer, seller or an observer on the sidelines — may shape bank M&A activity in the second half of 2019 and into 2020.

Moreover, while the banks continue to assess the potential impact of the current expected credit loss (CECL) standard, the general market consensus is CECL may require a capital charge. As such, M&A credit due diligence should be treated as an investment in reducing future losses, even though the loan quality is currently viewed as benign. Successfully driving value from acquisitions while mitigating risks requires a focused lens on M&A strategy with the right set of tools, teams and processes to perform due diligence, execute and integrate as needed.

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