Emerging M&A Trends: What To Expect



Deposits promise to be the hot topic for the banking industry in 2018, but more was revealed at Bank Director’s 2018 Acquire or Be Acquired conference about growth trends and M&A for U.S. financial institutions. While many banks are seeking to buy, not all banks are attractive partners. Further, bank stock valuations have had a significant impact on the M&A marketplace. Bank Director CEO Al Dominick provides an analysis of these issues in this video, including what potential buyers and sellers can expect this year.

  • The Importance of Deposits
  • Dynamics Driving the Industry
  • Bank Stock Pricing
  • Buyer & Seller Expectations

Acquire or Be Acquired Perspectives: Negotiating the M&A Landscape


merger-4-6-18.pngAsbury, John.pngThis is the first article of a five-part series that examines the bank M&A market from the perspective of five attendees at Bank Director’s Acquire or Be Acquired conference, which occurred in late January at the Arizona Biltmore resort in Phoenix.

Read the perspectives of other industry leaders:
Gary Bronstein, a partner at Kilpatrick Townsend & Stockton LLP
Eugene Ludwig, founder and CEO of Promontory Financial Group
Kirk Wycoff, managing partner of Patriot Financial Partners L.P.


The number of mergers and acquisitions in the bank industry over the last two years had been on the decline. A total of 196 unassisted mergers were consummated in 2017 compared to 223 in 2016 and 264 in 2015, according to the Federal Deposit Insurance Corp. Yet, with the recent tax cut and regulatory changes this trend could soon reverse course, suggests John Asbury, president and CEO of Union Bankshares, a $13 billion asset bank based in Richmond, Virginia.

I think [M&A activity] is picking up and I firmly believe that we’re going to see more consolidation,” Asbury said at Bank Director’s Acquire or Be Acquired conference in Phoenix, Arizona, earlier this year.

Asbury, who became CEO at Union in October 2016, is executing a growth strategy that balances acquisitions and organic growth. The opportunity to gain insight into the M&A market is why Asbury and hundreds of other bank CEOs, senior executives and board members attend Acquire or Be Acquired every January in Phoenix. “The reason I come and the reason why we have others come is really just the opportunity to see what the contemporary issues are,” says Asbury. But “the networking is off the charts. I think that’s important and not to be underestimated.”

The bank industry will never return to the salad days of consolidation in the mid-1990s, right after the barriers to branch and interstate banking came down. Yet, the conditions for further consolidation remain present, given the inherent advantages of scale in a highly commoditized industry with nearly 6,000 banks and savings institutions.

The U.S. Senate recently passed legislation that could provide modest regulatory relief to banks, and a more accommodative regulatory regime will fuel this in the short run, predicts Asbury. This is particularly true for potential acquirers that sit just below $10 billion assets, as Union Bankshares did until completing its purchase of Xenith Bancshares earlier this year.

“When you go over $10 billion in assets, several things happen,” says Asbury. “The most punishing aspect of it is the Durbin Amendment of the Dodd-Frank Act. The Durbin amendment caps our debit card interchange income, literally cutting it in half. For Union, that’s about a $10 million dollar a year revenue loss.”

The other threshold to watch is the one at $50 billion in assets, says Asbury, over which banks are considered to be systemically important and must submit to an even more stringent regulatory regime. The Senate bill would raise this threshold to $250 billion. “If it’s not as punishing for a bank to be over $50 billion dollars, I think you’re going to see [banks near it] become quite active.”

Size also comes into play in a less direct way that could impact smaller banks’ approach to deal-making. For years, large banks focused on acquisitions as their principal growth strategy. But now that JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. are prohibited from making additional acquisitions, as they already exceed the 10 percent nationwide deposit cap, they have turned inward for expansion, focusing instead on organic growth.

This changes the calculus for smaller banks in two ways, says Asbury. In the first case, community banks will no longer benefit from the customer attrition that large banks experienced in the wake of mergers and acquisitions. Additionally, because big banks are turning inward and pegging their growth strategies to the quality of their products and services, especially when it comes to technology, the value proposition of community banks, which traditionally revolved around better service, will be less effective at fueling growth.

It’s no longer as easy to pick up customers that are being run out by the big banks because of M&A,” says Asbury. “That’s why you’re seeing consolidation going on in our industry among the smaller players. It’s not just the regulatory regime; it’s also the ability to be relevant. The greatest risk to this industry, banks of any size, but particularly the smaller ones, is the risk of irrelevance. You’ve got to have sufficient scale. You’ve got to have a competitive product offering.”

Asbury points to Union’s recent move to hire a head of digital strategy. “You’re unlikely to find someone in that role at a much smaller institution because they probably don’t have the resources to be able to afford the role or to be able to afford executing a strategy around digital.”

As a result, Asbury predicts that the industry will continue to see mergers of equals among banks in the $500 million to $1 billion range, creating $2 billion to $3 billion banks.

An added benefit to combining banks of that size is it creates a more attractive takeout target. “One of the questions that I was asked [as a panel member at this year’s Acquire or Be Acquired] is how small is too small. I said in general under $1 billion is hard for us to think about because there are bigger fish to fry. We don’t want to be sidelined digesting a small opportunity when there’s a more strategically important larger opportunity around.”

Union is clearly in an acquisition mode, and Asbury says that banks looking for a buyer need be realistic when it comes to price. “There’s a lot of take-out premium on some of these smaller companies,” he says. “[It’s already] embedded in their stock. So I think it’s not realistic for management of these smaller banks…to expect a further premium on top of that.”

Legal Protections for Acquiring Banks



Due diligence just doesn’t tell an acquiring bank everything that should be known about a target—the process also shows that the acquirer’s team is committed to the deal. In this video, Stinson Leonard Street Partner Adam Maier explains how to protect the bank from potential losses in M&A.

  • The Roles of Due Diligence vs. Representations and Warranties
  • Addressing Risks Found in Due Diligence
  • Protecting the Buyer from Financial Loss

The Evolution of Regional Champions



Over the past decade, regional champions have emerged as strong performers in today’s banking environment, entering new markets and gaining market share through acquisitions. In this panel discussion led by Scott Anderson and Joe Berry of Keefe Bruyette & Woods, John Asbury of Union Bankshares, Robert Sarver of Western Alliance Bancorp. and David Zalman of Prosperity Bancshares share their views on strategic growth opportunities in the marketplace, and why culture and talent reign supreme in M&A.

Highlights from this video:

  • Characteristics of Regional Champions
  • Identifying Strategic Opportunities
  • Why Scale Might Be Overrated
  • Lessons Learned in M&A
  • What Makes a Good Acquisition Target

Video length: 41 minutes

 

Should Banks Focus on Potential Acquirers, or Future Partners?


partnership-2-22-18.pngEvidence of how intertwined banking and technology have become could be seen at Bank Director’s 24th annual Acquire or Be Acquired Conference in Arizona, where nearly 20 percent of all sessions at the M&A event were devoted to technology. And while the results of audience response surveys showed that this shift is well-founded, they also uncovered lingering resistance to explore new capabilities and partnerships from the many bank C-Suite executives in attendance. Given the rapid decline in the number of U.S. banks and the fact that the build-to-sell model is still alive and well, perhaps a community bank’s time is better spent courting potential acquirers than potential fintech partners.

The audience at the Acquire or Be Acquired Conference is a powerful industry sampling, with over 650 bank CEOs, senior executives and directors from both private and publicly held financial institutions across the nation. Much can be gleaned from the inclinations of this crowd with regard to the broader banking industry in the U.S., so Bank Director takes several audience polls throughout the conference to harness that collective insight. Some interesting statistics emerged from this year’s conversations. The bankers polled indicated that:

  • The primary driver of bank M&A activity in 2018 will be limited growth opportunities (45.9 percent). Only 7.2 percent of the audience cited the rise in technology-driven competition as the primary force behind M&A.
  • Yet, when asked about what 2018 holds for online-only lenders, 29.9 percent said that banks will lose business to them and they may become even greater competitive threats.
  • In addition, bankers at the conference believe their officers and directors will spend the most time talking about new technologies in 2018 (33.3 percent). Talent issues are potentially the second biggest topic for discussion (31.8 percent), which makes sense given that banks are working hard to compete against technology companies for talent. (See Bank Director’s 2017 Compensation Survey to learn more.)
  • While fintech is acknowledged as a competitive threat, 57.6 percent of the audience disagreed with the premise that using fintechs to improve profits and attract customers is critical for their bank’s near-term success.
  • What’s more, 65 percent of those polled rate their key vendors (payments, digital, core, lending, risk/fraud, etc.) as merely adequate—but still plan to re-sign with them when the time comes.

Is this the portrait of an industry that’s resistant to change, more risk averse than driven to grow, or does a closer look reveal pragmatic reasons for avoiding the headlong rush to adopt new technology solutions?

On day one of Acquire or Be Acquired, Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. Investment Banking, shared some stark statistics about the shrinking banking industry. We currently see both a lack of de novo bank openings (just eight new banks since 2010) and rapid consolidation, which Carpenter said is creating larger community banks and a focus on exit planning. Another audience poll confirmed that over half (52.8 percent) of the audience still believe the build-to-sell business model is viable. In addition, a majority of the crowd (42.4 percent) believes that the banks with the best chance to thrive operate an acquisition-driven growth model. If bankers think their best bet is to build their bank into an attractive acquisition target and wait to be bought, it’s no wonder they’re in no rush to bear the time and expense of adopting new technologies focused on organic growth.

From the stage, Carpenter posed a startling if central question: “Is this the end of community banking?” With consolidation on the rise and de novos all but extinct, the answer seems to trend to yes. If that’s true, are fintechs better served by targeting the banks with active acquisition programs as potential partners instead of potential sellers?

As consolidation continues, banks and fintechs need to keep a weather eye on one another. Each side of the equation has valuable information and strategies to offer the other, and the fates of these two industries are inextricably linked. Whatever course the banking industry takes, Bank Director and FinXTech will be there to help explore the strategies and relationships that unfold.

Well Conceived and Executed Bank Acquisitions Drive Shareholder Value


acquisition-2-21-18.pngRecent takeovers among U.S.-based banks generally have resulted in above-market returns for acquiring banks, compared to their non-acquiring peers, according to KPMG research. This finding held true for all banks analyzed except those with greater than $10 billion in assets, for which findings were not statistically significant.

Our analysis focused on 394 U.S.-domiciled bank transactions announced between January 2012 and October 2016. Our study focused on whole-bank acquisitions and excluded thrifts, acquisitions of failed banks and government-assisted transactions. The analysis yielded the following conclusions:

  • The market rewards banks for conducting successful acquisitions, as evidenced by higher market valuations post-announcement.
  • Acquiring banks’ outperformance, where observable, increased linearly throughout our measurement period, from 90 days post-announcement to two years post-announcement.
  • The positive effect was experienced throughout the date range examined.
  • Banks with less than $10 billion in assets experienced a positive market reaction.
  • Among banks with more than $10 billion in assets, acquirers did not demonstrate statistically significant differences in market returns when compared to banks that did not conduct an acquisition.

Factors Driving Value

Bank size. Acquiring banks with total assets of between $5 billion and $10 billion at the time of announcement performed the strongest in comparison with their peers during the period observed. Acquiring banks in this asset range outperformed their non-acquiring peers by 15 percentage points at two years after the transaction announcement date, representing the best improvement when compared to peers of any asset grouping and at any of the timeframes measured post-announcement.

Performance-chart.png 

Acquisitions by banks in the $5 billion to $10 billion asset range tend to result in customer expansion within the acquirer’s market or a contiguous market, without significant increases in operational costs.

We believe this finding is a significant factor driving the value of these acquisitions. Furthermore, banks that acquire and remain in the $10 billion or less asset category do not bear the expense burden associated with Dodd-Frank Act stress testing (DFAST) compliance.

Conversely, banks with nearly $10 billion in assets may decide to exceed the regulatory threshold “with a bang” in anticipation that the increased scale of a larger acquisition may serve to partially offset the higher DFAST compliance costs.

The smaller acquiring banks in our study—less than $1 billion in assets and $1 billion to $5 billion in assets—also outperformed their peers in all periods post-transaction (where statistically meaningful). Banks in these asset ranges benefited from some of the same advantages mentioned above, although they may not have received the benefits of scale and product diversification of larger banks.

As mentioned earlier, acquirers with greater than $10 billion in assets did not yield statistically meaningful results in terms of performance against peers. We believe acquisitions by larger banks were less accretive due to the relatively smaller target size, resulting in a less significant impact.

Additionally, we find that larger bank transactions can be complicated by a number of other factors. Larger banks typically have a more diverse product set, client base and geography than their smaller peers, requiring greater sophistication during due diligence. There is no substitute for thorough planning, detailed due diligence and an early and organized integration approach to mitigate the risks of a transaction. Furthermore, alignment of overall business strategy with a bank’s M&A strategy is a critical first step to executing a successful acquisition (or divestiture, for that matter).

Time since acquisition. All three acquirer groups that yielded statistically significant results demonstrated a trend of increasing returns as time elapsed from transaction announcement date. The increase in acquirers’ values compared to their peers, from the deal announcement date until two years after announcement, suggests that increases in profitability from income uplift, cost reduction and market expansion become even more accretive with time.

Positive performance pre-deal may preclude future success. Our research revealed a positive correlation between the acquirer’s history of profitability and excess performance against peers post-acquisition. We noted this trend in banks with assets of less than $1 billion, and between $1 billion and $5 billion, at the time of announcement.

This correlation suggests that banks that were more profitable before a deal were increasingly likely to achieve incremental shareholder value through an acquisition.

Bank executives should feel comfortable pursuing deals knowing that the current marketplace rewards M&A in this sector. However, our experience indicates that in order to be successful, acquirers should approach transactions with a thoughtful alignment of M&A strategy with business strategy, an organized and vigilant approach to due diligence and integration, and trusted advisers to complement internal teams and ensure seamless transaction execution.

Gonzo Views on Banking


In this series of videos, Steve Williams and Scott Sommer of Cornerstone Advisors interview industry leaders for their views on the capital investments that banks should make in today’s bull market, how to position the bank to excel after the deal is done and how acquirers should approach technology contracts early in the M&A process.

Cautious Optimism for Bank M&A


industry-1-29-18.pngThere is a general sense of optimism about the state of deal-making in the banking industry at Bank Director’s Acquire or Be Acquired conference in Phoenix, Arizona. Bankers and industry observers pointed repeatedly throughout the first day to the fact that bank stock valuations have soared in the 14 months since the 2016 presidential election, opening up new possibilities for interested buyers and sellers.

Bank stocks faced an uncertain if not bleak future two years ago, a point that Thomas Michaud, president and CEO of Keefe, Bruyette & Woods, used to set the scene for the state of banking in 2018. Oil prices had dropped to below $30 a barrel, economic growth in China seemed to be tempering and the United Kingdom was lurching towards a nationwide referendum on quitting the European Union. This trifecta of bad news led bank stocks to drop, producing a dour outlook for prospective sellers.

Yet, you only had to flash forward to the end of 2016 to find a dramatically altered landscape. Stocks soared following the presidential election. And no industry benefited more than banks, where share prices rose by nearly a third over the next four months. Since the beginning of 2016, large-cap bank stocks have climbed 55 percent while regional bank stocks have gained 44 percent—both having bettered the S&P 500’s 36 percent advance over the same stretch.

This has resulted in meaningfully higher valuations, a core driver of deal activity. Prior to the presidential election, banks were valued below their 15-year median of 15.2 times forward earnings per share estimates. After peaking at 18.8 times forward earnings in the immediate wake of the election, they have settled at 15.4. But even though bank valuations are up, which makes deals more attractive to buyers and sellers with higher multiples, they are nowhere near euphoric levels, given the mere 20 basis point premium over the long-run average.

Virtually everyone you talk to at this year’s gathering of more than 1,000 bankers from across the country believes there is still room for these valuations to climb even higher. This was a point made in a session on the drivers of a bank’s value by Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. Investment Banking. In just the last five weeks of 2017, six deals priced for more than two times tangible book value were announced, creating strong momentum for 2018.

Underlying all of this is an improved outlook for bank profitability, the primary determinate of valuation. In the immediate wake of the financial crisis, it was common to hear people say that banks would be lucky to return 1 percent on their assets. Now, a combination of factors is leading people like Michaud to forecast that the average bank will generate a 1.2 percent return on assets.

Multiple factors are playing into this, beginning with the pristine state of the industry’s asset quality. You have to go back to the 1970s to find the last time the current credit outlook for banks was this good, says Michaud. This has some industry observers watching closely. One of them is Tim Johnson, who leads KPMG LLP’s deal advisory financial services sector. Johnson commented in a panel discussion on deal-making that he believes the consumer credit cycle could take a turn for the worse this year. But there are others, like Tom Brown, founder and chief executive officer of the hedge fund Second Curve Capital, who doesn’t see any reason to be worried about consumer credit trends in light of the low unemployment rate and high consumer confidence.

The expected changing of the guard atop the regulatory agencies is a second factor fueling optimism that profitability will improve this year. Former banker Joseph Otting is the new comptroller of the currency, while Jerome Powell has been confirmed as the new chair of the Federal Reserve Board. Jelena McWilliams awaits confirmation by the U.S. Senate as the new chairman of the Federal Deposit Insurance Corp., and President Donald Trump is expected to nominate a new director to lead the Consumer Financial Protection Bureau. While there are few signs of tangible benefits in terms of a lower compliance burden from the new administration, this should eventually change once new leaders are in place at the top of all of the agencies.

Last but not least, the biggest boost to profitability in the industry will come from the recently enacted corporate tax cuts, which lower the corporate income tax rate from 35 percent down to 21 percent. The drop is so significant that it caused KBW to raise its earnings estimates for banks by 14 percent in 2018 and 12 percent in 2019. And when you factor in the likelihood that many banks will use the savings to buy back stock, KBW projects that earnings per share in the industry will climb this year by 25.6 percent over 2017.

The atmosphere on the first day of the conference was thus upbeat, with presenters and attendees projecting a sense of cautious optimism over the improved outlook for the industry. At the same time, there is recognition that the longer-term macro consolidation cycle that shifted into high gear following the elimination of laws against interstate banking in the mid-1990s could soon reach critical mass. If that were to happen, banks that don’t capitalize on today’s improved outlook by seeking a partner could be left standing alone at the merger alter.

A Witness to M&A History


merger-1-28-18.pngWhen Bank Director hosted its first Acquire or Be Acquired conference in 1994, there were 12,604 banks and thrifts in the U.S., according to the Federal Deposit Insurance Corp. As of the third quarter of 2017, which is the FDIC’s most recent tally, there were 5,737 banks and thrifts—a 54.5 percent decrease. That is a stunning reduction in the number of depository institutions over this period of nearly two and a half decades, and the Acquire or Be Acquired conference has been a witness—and a chronicler—of it all.

This year’s event will kick off on Sunday, January 28 at the Arizona Biltmore Resort in Phoenix. By my count, I have attended 18 of these conferences, and the things we have discussed while we were there have changed over time and are always a reflection of the times. In the early 2000s, when the U.S. economy was strong and big banks were still in the game, we focused on the dealmakers who were building banking empires and taught the fundamentals of putting together a successful M&A transaction. During the depths of the financial crisis, when there wasn’t much M&A activity going on as many banks were more focused on shoring up their shaky balance sheets, and some were taking money from the Treasury Department’s Troubled Asset Relief Program, we talked a lot about strategies for raising capital. And since the few transactions during that period tended to be government-assisted deals with the FDIC, we offered advice on how to do those successfully.

More recently, as the industry’s financial health has returned, capital levels have improved and there are no longer many broken banks to buy, we have focused on the mechanics of buying and selling healthy banks. For many banks today, M&A has once again become the centerpiece of their strategic growth plans. However, we have also expanded the conference’s focus in recent years by adding general sessions and workshops on a broad array of topics including financial technology, lending, data, interest rates and deposits. The decision to buy or sell a bank is rarely made on the strength of the deal price alone, but is driven by these and other critical business considerations. We have tried to account for that broader perspective.

An issue that has been an underpinning to Acquire or Be Acquired from its very beginning has been the banking industry’s consolidation, a trend that dates back to at least the early 1980s. Last year there were 261 healthy bank acquisitions, according to S&P Global Market Intelligence, compared to 240 in 2016 and 278 in 2015. The outlook for 2018 is good, based on the rise in bank stock valuations following the enactment of a tax reform law that drastically cuts the corporate tax rate. With a stronger currency in the form of a higher stock price, acquirers should have an easier time putting together deals that are attractive to their own shareholders. It’s a fool’s game to predict the number of transactions in any given year (and a game that I have played, foolishly and without much success, in years past), but I would expect to see deal volume this year somewhere in that 240 to 278 range, which has come to represent a normalized bank M&A market in recent years.

Whatever the deal count in 2018 turns out to be, the banking industry’s consolidation rolls on, and the Acquire or Be Acquired conference will continue to be a witness to history.

Bank M&A: Pricing Considerations for 2018



Forty-four percent of the bank executives and directors responding to Bank Director’s 2018 Bank M&A Survey indicate that rising bank valuations made it more difficult to compete for acquisition targets, and higher prices didn’t result in a significant increase in deal activity in 2017. Rick Childs, a partner at survey sponsor Crowe Horwath LLP, explains how today’s environment fuels his expectations for the year, and why he thinks regulatory relief could result in fewer transactions.

  • Bank Valuations and Pricing
  • Impact of Regulatory Relief on M&A

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