Pandemic Challenges, Strengthens Bank’s Deal Integration

One bank found that the Covid-19 pandemic actually accelerated its deal integration, creating a stronger pro-forma institution to serve clients after overcoming a number of unexpected hurdles.

The coronavirus crisis has thrown a wrench in bank mergers and acquisitions, challenging everything from due diligence to pricing to regulatory and shareholder approvals. Only two bank deals were announced in May, according to S&P Global Market Intelligence; potential buyers and sellers seem to be focusing on assisting customers while they wait for a normalized environment. But Sandy Spring Bancorp found itself with no choice but to adapt its deal integration with Rockville, Maryland-based Revere Bank, even as both banks shifted to a remote work environment.

For us, it’s very important to understand that not just the successful integration, but a successful acquisition is centered around finding the right partner to begin with,” says Sandy Spring President and CEO Daniel Schrider. “And it’s really important … to find an organization that either complements what we do or provides access to a different market that maybe we’re not in, but has a shared vision around client relationships.”

The Revere team was well-known to Sandy Spring, with executives serving on their state bank association as well as competing against each other for local deals. After talking for about 18 months, they announced their merger agreement in September 2019; the deal pushed the Olney, Maryland-based bank above $10 billion in assets.

For months, deal integration proceeded as expected. The banks kicked off internal communication campaigns to keep both groups informed of the timeline, process and upcoming changes, and increase comradery before merger close. They formed 20 cross-functional teams of employees from both companies that tackled specific integration-related tasks or objectives, which met through mid-February.

“Both companies had tremendous first quarters. We were very excited about bringing the two organizations in a new structure and pulling the trigger on a number of things, based upon our ability to be together,” he says. “Then obviously, things came to a screeching halt.”

Once the pandemic closed physical offices, Sandy Spring used video and electronic communication to continue integration work. The pro-forma executive team created welcome videos featuring Schrider, along with digital and virtual orientations, instead of the usual face-to-face interactions.

But the integration encountered yet another unexpected challenge: the Paycheck Protection Program. The Small Business Administration loan program began accepting applications on April 3, two days after the Revere acquisition closed.

All of a sudden, two companies were faced with trying to solve the problems that many of their clients are having,” Schrider says. “That actually accelerated our integration.”

The newly combined teams, which pride themselves on being relationship focused, worked together to fulfill the unsolicited loan demand. They hosted daily PPP calls and involved more than 200 employees to process applications from customers at both banks. The undertaking combatted any inertia they may have felt about actually combining and functioning as one company.

“In a strange way, we’re probably in a better place today than we would have been, absent a pandemic, from the standpoint of being together,” he says. “Even though we’re not physically together.”

Sandy Spring believes picking a bank partner with similar values and staying focused on its strategy helped the pro-forma institution navigate deal-specific challenges. For instance, the all-stock deal for Revere originally carried a price tag of $460.7 million when it was announced in September; at close, it was valued at $287 million based on Sandy Spring’s quarter-end stock price, according to S&P Global Market Intelligence. Schrider says potential buyers and sellers should avoid fixating on absolute deal price, and instead consider the relative value and potential upside of the combined entity’s shares.

So far, the only integration activities that the pandemic has paused are reorganization efforts the bank believes are best done in person, including the planned appointment of Revere co-CEO Ken Cook as executive vice president. The systems conversion and branch consolidation are still on track for the third quarter. Until then, the pro-forma institution will continue to integrate while serving clients during the pandemic.

“It’s been a wild ride but a good one,” Schrider says.

Pending, Future Bank M&A Challenged by Coronavirus Crisis

The coronavirus pandemic has complicated bank M&A, throwing prospective buyers and sellers into limbo.

The crisis and economic fallout have made mergers and acquisitions an even-more tenuous proposition for banks that find themselves in the middle of a uniquely challenging operating environment. Industry experts believe that activity may come to a standstill for the time being but see opportunity for patient buyers once it thaws.

“I think it’s kind of high drama in every situation, if you put yourself on the board of either side of these transactions,” says Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. Investment Banking. “I’m really surprised that more deals have not fallen apart, quite frankly.”

Deals that have held together so far are most likely situations where both parties have been equally impacted by the economic shutdown and believe that the transaction’s merits will remain unchanged once the pandemic subsides, he says.

But the selloff in the equity markets has weighed on valuations for stock-based deals, making them untenable for some parties. Increasing credit risk, low interest rates, net interest margin compression and high unemployment are all headwinds for bank earnings, creating a potential ceiling on stock valuations. The average share price of an acquirer with an outstanding transaction has dropped about 20% in the last three months, says Crowe partner Rick Childs. If a transaction was all stock, the discount is fully included in the price; a split between cash and stock dilutes the selloff discount.

Half of the eight deals that have been terminated since the start of the year were impacted by the coronavirus crisis, Childs says. The largest of the terminated deals was the proposed $3.3 billion merger between the $36 billion Texas Capital Bancshares, based in Dallas, and Independent Bank Group, which is based in McKinney, Texas, and has $16 billion in assets. Several more have been postponed or renegotiated.

Buyers may try to argue that stock declines are temporary, though some are choosing to renegotiate. San Diego-based Southern California Bancorp, which has $852 million in assets, disclosed in April that it had renegotiated its October 2019 merger agreement with CalWest Bancorp. It lowered its all-cash offer by 19% for the Rancho Santa Margarita, California-based bank, to $25.9 million. The acquisition of the $226 million bank closed June 1.

But there is still risk for cash buyers and other parties committing to closing a deal. For years, credit had been so clean that buyers risked “giving lip service” to doing due diligence on a seller, Childs says. Now, acquirers must take pains to understand the potential risks they might be buying, especially as banks process deferrals and loan forgiveness applications for the Small Business Administration’s Paycheck Protection Program.

Deals may also take longer to close during the pandemic because regulators have limited capacity, though not in every case. Childs is involved in some delayed deals because regulators have shifted their attention away from applications to assisting banks with changing policies and emerging issues or questions. Banks that have announced delays are adding an average of two additional months, he says.

However, some banks have managed to receive timely, or early, approvals. CenterState Bank Corp., which has $19 billion in assets and is based in Winter Haven, Florida, disclosed that it had received all regulatory approvals ahead of schedule for its merger with South State Corp., which has $17 billion in assets and is based in Columbia, South Carolina.

While the environment may be challenging for pending deals, it could be productive for prospective ones. Childs says cash buyers may find management teams with an increased interest in selling because of crisis fatigue and the anticipation of a long road to economic recovery, which could lead to compelling valuations. Carpenter counters that sellers may not want to accept a cash deal because it would be a permanent discounted valuation. Accepting equity gives the seller’s shareholders a way to ride out the recovery and could make a lower initial valuation more palpable. Both Childs and Carpenter are working on deals that have yet to be announced.

Buyers that have stock may want to include struggling fintechs in their search for potential targets, Childs says. Fintechs may have superior technology or capabilities that could add a business line or increase a buyer’s capabilities, but face funding or capital challenges because of the economic crisis.

“Either taking a significant ownership stake or buying it outright might be a heck of a deal for you, and your stock is probably going to be better than their stock,” he says.

In the meantime, Childs advises banks to trim the fat from their financial statements. If a bank has been on the fence about assets, business lines or portfolios it owns, now is an opportunistic time to sell them and raise cash. It is also a good time for cash buyers to establish credit lines or loan arrangements they may use to finance a deal, but cautioned stock buyers against raising equity capital until prices recover.

“I think we’ll have a few more deals called off between now and their expected closing dates, but probably what we’ll see is very few announced deals unless we come back in a big way,” Childs says. “We may end up having a great fourth quarter because of pent-up demand, but there will probably be a dip in the middle part of the year.”

The Biggest Priorities for Banks in Normal Times

Banks are caught in the midst of the COVID-19 pandemic sweeping across the United States.

As they care for hurting customers in a dynamic and rapidly evolving environment, they cannot forget the fundamentals needed to steer any successful bank: maintaining discipline in a competitive lending market, attracting and retaining high-quality talent and improving their digital distribution channels.

Uncovering bankers’ biggest long-term priorities was one of the purposes of a roundtable conversation between executives and officers from a half dozen banks with between $10 billion and $30 billion in assets. The roundtable was sponsored by Deloitte LLP and took place at Bank Director’s annual Acquire or Be Acquired conference at the end of January, before the brunt of the new coronavirus pandemic took hold.

Kevin Riley, CEO of First Interstate BancSystem, noted that customers throughout the $14.6 billion bank’s western footprint were generally optimistic prior to the disruption caused by the coronavirus outbreak. Washington, Oregon and Idaho at the time were doing best. With trade tensions and fear of an inverted yield curve easing, and with interest rates reversing course, businesses entered 2020 with more confidence than they entered 2019.

The growth efforts reflect a broader trend. “In our 2020 M&A Trends survey, corporate respondents cited ‘efficiency and effectiveness in change management’ and ‘aligning cultures’ as the top concerns for new acquisitions,” says Liz Fennessey, M&A principal at Deloitte Consulting.

A major benefit that flows from an acquisition is talent. “More and more, we’re seeing M&A used as a lever to access talent, which presents a new set of cultural challenges,” Fennessey continues. “In the very early stages of the deal, the acquirer should consider the aspects core to the culture that will help drive long-term retention in order to preserve deal value.”

One benefit of the benign credit environment that banks enjoyed at the end of last year is that it enabled them to focus on core issues like talent and culture. Tacoma, Washington-based Columbia Banking System has been particularly aggressive in this regard, said CEO Clint Stein.

The $14.1 billion bank added three new people to its executive committee this year, with a heavy emphasis on technology. The first is the bank’s chief digital and technology officer, who focuses on innovation, information security and digital expansion. The second is the bank’s chief marketing and experience officer, who oversees marketing efforts and leads both a new employee experience team and a new client experience team. The third is the director of retail banking and digital integration, whose responsibilities include oversight of retail branches and digital services.

Riley at First Interstate has employed similar tactics, realigning the bank’s executive team at the beginning of 2020 to add a chief strategy officer. The position includes leading the digital and product teams, data and analytics, as well as overseeing marketing, communications and the client contact center.

The key challenge when it comes to growth, particularly through M&A, is making sure that it improves, as opposed to impairs, the combined institution’s culture. “It is important to be deliberate and thoughtful when aligning cultures,” says Matt Hutton, a partner at Deloitte. “It matters as soon as the deal is announced. Don’t miss the opportunity to build culture momentum by reinforcing the behaviors you expect before the deal is complete.”

Related to the focus on growth and talent is an increasingly sharp focus on environmental, social and governance issues. For decades, corporations were operated primarily for the benefit of their shareholders — a doctrine known as shareholder primacy. But this emphasis has begun to change and may accelerate alongside the unfolding health crisis. Over the past few years, large institutional investors have started promoting a more inclusive approach known as stakeholder capitalism, requiring companies to optimize returns across all their stakeholders, not just the owners of their stock.

The banks at the roundtable have embraced this call to action. First National Bank of Omaha, in Omaha, Nebraska, publishes an annual community impact report, detailing metrics that capture the positive impact it has in the communities it serves. Columbia promotes the link between corporate social responsibility and performance. And First Interstate, in addition to issuing an annual environmental, social and governance report, has taken multiple steps in recent years to improve employee compensation and engagement.

Despite the diversity of business lines and geographies of different banks, these regional lenders shared multiple common priorities and fundamental focuses going into this year. The coronavirus crisis has certainly caused banks to change course, but there will be a time in the not-too-distant future when they and others are able to return to these core focuses.

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.