Pandemic Offers Strong Banks a Shot at Transformative Deals

It’s a rule of banking that an economic crisis always creates winners and losers. The losers are the banks that run out of capital or liquidity (or both), and either fail or are forced to sell at fire-sale prices. The winners are the strong banks that scoop them up at a discount.

And in the recent history of such deals, many of them have been transformative.

The bank M&A market through the first six months of 2020 has been moribund – just 50 deals compared to 259 last year and 254 in 2018, according to S&P Global Market Intelligence. But some banks inevitably get into trouble during a recession, and you had better believe that well-capitalized banks will be waiting to pounce when they do.

One of them could be PNC Financial Services Group. In an interview for my story in the third quarter issue of Bank Director magazine – “Surviving the Pandemic” – Chairman and CEO William Demchak said the $459 billion bank would be on the lookout for opportunistic deals during the downturn. In May, PNC sold its 22% stake in the investment management firm BlackRock for $14.4 billion. Some of that money will be used to armor the bank’s balance sheet against possible losses in the event of a deep recession, but could also fund an acquisition.

PNC has done this before. In 2008, the bank acquired National City Corp., which had suffered big losses on subprime mortgages. And three years later, PNC acquired the U.S. retail business of Royal Bank of Canada, which was slow to recover from the collapse of the subprime mortgage market.

Together, these deals were transformational: National City gave PNC more scale, while Royal Bank’s U.S. operation extended the Pittsburgh-based bank’s franchise into the southeast.

“We’re more than prepared to do it,” Demchak told me in an interview in late May. “And when you have a safety buffer of capital in your pocket, you can do so with a little more resolve than you otherwise might. The National City acquisition was not for the faint of heart in terms of where we were [in 2008] on a capital basis.”

One of the most profound examples of winners profiting at the expense of the losers occurred in Texas during the late 1980s. From 1980 through 1989, 425 Texas banks failed — including the state’s seven largest banks.

The root cause of the Texas banking crisis was the collapse of the global oil market, and later, the state’s commercial real estate market.

The first big Texas bank to go was actually Houston-based Texas Commerce, which was acquired in 1986 by Chemical Bank in New York. Texas Commerce had to seek out a merger partner after absorbing heavy loan losses from oil and commercial real estate. Through a series of acquisitions, Chemical would later become part of JPMorgan Chase & Co.

Two years later, Charlotte, North Carolina-based NCNB Corp. acquired Dallas-based First Republicbank Corp. after it failed. At the time, NCNB was an aggressive regional bank that had expanded throughout the southeast, but the Texas acquisition gave it national prominence. In 1991, CEO Hugh McColl changed NCNB’s name to NationsBank; in 1998, he acquired Bank of America Corp. and adopted that name.

And in 1989, a third failed Texas bank: Dallas-based MCorp was acquired by Bank One in Columbus, Ohio. Bank One was another regional acquirer that rose to national prominence after it broke into the Texas market. Banc One would also become part of JPMorgan through a merger in 2004.

You can bet your ten-gallon hat these Texas deals were transformative. Today, JPMorgan Chase and Bank of America, respectively, are the state’s two largest banks and control over 36% of its consumer deposit market, according to the Federal Deposit Insurance Corp. Given the size of the state’s economy, Texas is an important component in their nationwide franchises. 

Indeed, the history of banking in the United States is littered with examples of where strong banks were able to grow by acquiring weak or failed banks during an economic downturn. This phenomenon of Darwinian banking occurred again during the subprime lending crisis when JPMorgan Chase acquired Washington Mutual, Wells Fargo & Co. bought out Wachovia Corp. and Bank of America took over Merrill Lynch.

Each deal was transformative for the acquirer. Buying Washington Mutual extended JPMorgan Chase’s footprint to the West Coast. The Wachovia deal extended Wells Fargo’s footprint to the East Coast. And the Merrill Lynch acquisition gave Bank of America the country’s premier retail broker.

If the current recession becomes severe, there’s a good chance we’ll see more transformative deals where the winners profit at the expense of the losers.

Does Market Volatility Impact Bank M&A?


While the volatility in the stock market garners the attention of investors, it is also a worrisome topic for bank boards. As the Federal Reserve considers its first rate increase in close to 10 years—and China’s growth outlook continues to wane and impact economies around the world—bank boards have to consider the impact on their growth strategies, including any planned capital raises, IPOs or mergers and acquisitions.

Certainly, unexpectedly large swings in daily share prices make it difficult to price a potential M&A deal. This comes in an environment where bank M&A volume has not increased much, if at all, depending on how you look at the numbers. As you can see in the chart below, we have had just 34 deals with a value of more than $50 million year to date through Sept 7, 2015, which puts us slightly below the rate of 2014, according to Mark Fitzgibbon, a principal and the director of research at investment bank Sandler O’Neill + Partners.

Most bank deals are smaller than $50 million in value, however. In an upcoming article for BankDirector.com, Crowe Horwath LLP, a consulting and accounting firm, looked at all deal volume through June 30, 2015, and found 140 deals, slightly above last year’s volume in the same time frame of 130 deals.

Clearly, the lion’s share of the transactions has been small bank deals, and we have not seen many large transactions this year. Fitzgibbon is of the opinion that there are three dynamics that have slowed the pace of consolidation: (a) recent market volatility makes it tough to price deals, (b) large banks have generally been more internally focused than M&A focused, and (c) regulators have been slow to approve some deals, giving pause to some buyers.

This complements the perspectives of Fred Cannon, executive vice president and global director of research at Keefe, Bruyette & Woods, who reminded me that the pace of M&A “is simply a lot slower than it was prior to the crisis, and those of us who remember pre-crisis M&A, it will likely never be the same. We don’t have national consolidators buying up banks, and regulation does not allow the same speed of consolidation we previously had.”  In Cannon’s words, “volatility certainly slows deals a bit, but it postponed deals rather than stopped them.”

Contrast that with initial public offerings, which can really take a beating in a volatile market. Depending on the market and the individual bank’s potential value, it may no longer make sense to price an IPO, or it may make sense to delay it.

Here, I agree with Cannon’s assertion that a weak market is “more detrimental to IPOs than M&A. With M&A, the relative value of the buyers’ currency is often more important than the absolute level.” So if values fall for both the buyer and seller, the deal may still make sense for both of them. For potential deal making, market volatility is rarely good news, but it may not be as bad as it seems.

2015 L. William Seidman CEO Panel




During Bank Director’s 2015 Acquire or Be Acquired conference in January, a panel of four community bank CEOs, all of whom are publicly traded, above $5 billion in asset size and are active acquirers discuss their different strategies for the future with our president, Al Dominick. This session is named after the former FDIC Chairman and Bank Director’s Publisher, the late L. William Seidman, who was a huge advocate of a strong and healthy community bank system.

Video length: 46 minutes

About the speakers

David Brooks – Chairman & CEO at Independent Bank Group
David Brooks is chairman and CEO of McKinney-headquartered Independent Bank Group, which currently operates 35 Independent Bank locations spanning across Texas. He has been active in community banking since the early 1980s and founded this company in 1988.

Daryl Byrd – President & CEO at IBERIABANK Corporation
Daryl Byrd is president and CEO of IBERIABANK Corporation. He serves on the boards of directors for both IBERIABANK Corporation and IBERIABANK, where he joined in 1999. Headquartered in Lafayette, LA, IBERIABANK is the 126-year-old subsidiary of IBERIABANK Corporation operating 187 branch offices throughout Louisiana, Arkansas, Alabama, Florida, Texas and Tennessee. With $15.5 billion in assets (as of October 31, 2014) and over 2,700 associates, IBERIABANK Corporation is the largest and oldest bank holding company headquartered in Louisiana.

Ed Garding – President & CEO at First Interstate BancSystem, Inc.
Ed Garding is president and CEO of First Interstate BancSystem, Inc. He has been chief executive officer of First Interstate BancSystem since April 2012, chief operating officer from August 2010 and served as an executive vice president since January 2004. Mr. Garding served as First Interstate’s chief credit officer from 1999 to August 2010, senior vice president from 1996 through 2003, president of First Interstate Bank from 1998 to 2001 and president of the Sheridan branch of First Interstate Bank from 1988 to 1996. In addition, Mr. Garding has served as a director of First Interstate Bank since 1998.

Mark Grescovich – President & CEO at Banner Corporation
Mark Grescovich is president and CEO at Banner Corporation. He joined Banner in April 2010 as president and became CEO in August 2010 following an extensive banking career specializing in finance, credit administration and risk management. Under his leadership, Banner has executed an extremely successful turnaround plan involving credit stabilization, improved risk management, a secondary public offering and other capital raising activities and a return to profitability based on net interest margin improvements.

L. William Seidman CEO Panel



During Bank Director’s 2014 Acquire or Be Acquired conference in January, a panel of three community bank CEOs, all of whom have completed a recent acquisition, look at what the future holds for community banks and share their individual experiences and perspectives. This session is named after the former FDIC Chairman and Bank Director’s Publisher, the late L. William Seidman, who was a huge advocate of a strong and healthy community bank system.

Video Length: 53 minutes

About the Speakers

G. William Beale, CEO, Union First Market Bank
Billy Beale is the chief executive officer of Union First Market Bankshares, a publicly traded diversified financial services company based in Richmond, Virginia. He has held this position since the formation of the company and its predecessors in July 1993. Prior to joining Union in May 1989, Mr. Beale had spent 18 years working for 3 banks in Texas.

Richard B. Collins, President, CEO & Chairman of United Bank
Dick Collins is the president, CEO & chairman of United Bank since 2001. Prior to joining United Bank, he was president and CEO at First Massachusetts Bank in Worcester, Massachusetts. Other positions Mr. Collins has held are regional president at Bank of Boston from 1994-1995 and president and CEO at Mechanics Bank from 1983-1994.

William H. W. Crawford, IV, President & CEO of Rockville Bank and Rockville Financial, Inc.
Bill Crawford is the president and CEO of Rockville Bank and Rockville Financial, Inc. In this position, he is responsible for the build out of the company’s infrastructure including the addition of a risk department, the expansion of the mortgage banking division, the enhancement of the financial advisory services division, the introduction of the private banking division and the acquisition of a commercial lending team from a competitor bank.

E. Robinson McGraw, Chairman & CEO, Renasant Corporation
Robin McGraw is the chairman and CEO of Renasant Corporation and Renasant Bank. He has been with Renasant for 38 years and assumed his current role in 2001. Mr. McGraw is past chairman of the Mississippi Bankers Association. Also active on the national banking level, he has been a member of the American Bankers Association’s government relations council.

2012 Bank M&A: Volume and Pricing Improves, Uncertainty Remains


uncertainty-clouds.jpgOver the past several years, numerous pundits have predicted a wave of consolidation in the banking industry based on a number of factors, including increased cost of regulation, limited access to capital, and lack of growth opportunities, to name a few.

While the current level of uncertainty in the marketplace and the level of pricing available to sellers have kept the pace of consolidation consistent, the levels are well below the predicted tidal wave of consolidation.

Deal activity for the first six months of 2012 indicates a pace of consolidation ahead of 2011 and 2010 levels, but still well below levels before the credit crisis. The year-to-date price-to-book value (P/BV) and price-to-tangible book value (P/TBV) ratios for bank deals are improved over 2011 indexes and consistent with 2010 indexes.

M&A Deals*

Year

# of Deals

Avg. P/BV

Avg. P/TBV

2010

177

113.51%

119.84%

2011

154

101.83%

106.27%

YTD 2012

106

115.86%

120.54%

Source: SNL Financial / *Excludes FDIC-assisted transactions

Uncertainty Does Not Breed Confidence

In a survey on merger and acquisition conditions jointly conducted by Bank Director and Crowe Horwath LLP in October 2011, one of the primary impediments to consolidation was reluctance to take a chance on an acquisition in uncertain economic conditions. This concern can be translated into uncertainty regarding credit quality.

History has shown that high levels of credit problems in the banking industry inversely impact the number of acquisitions closed.

crowe-asset-quality.png

To put this into more qualitative terms, buyers and sellers tend to view the levels of credit issues in different ways, and bridging the chasm between the two views has impeded acquisitions. In fact, survey respondents indicated that concern over the asset quality of selling institutions was the number one reason why they would not engage in bank acquisitions.

Lower FDIC Deal Volume

As the Federal Deposit Insurance Corporation (FDIC) continues to work with troubled institutions, the number of assisted transactions has diminished from its peak in 2010.

FDIC-Assisted Deals 

Year

# of Deals

Avg. Assets Sold

2010

147

$550,097

2011

90

$355,000

YTD 2012

28

$234,770

Source: SNL Financial

In addition to a decrease in the number of deals in 2012 from prior years, the average asset size of the institutions sold has also decreased. This indicates that the FDIC has resolved the issues for most of the larger troubled institutions and is now focusing on the remaining smaller institutions.

The FDIC also has been structuring more transactions in 2012 and 2011 without loss-share agreements, which were prevalent in 2010 transactions.

FDIC-Assisted Deals and Loss Sharefdic-loss-share.png

Some of this trend can be attributed to buyers opting against having the FDIC as a future business partner, and some is the result of the FDIC not offering loss-share agreements or offering loss-share agreements on only a part of the loan portfolio. This trend likely accounts for some of the increase in the asset discount on those deals in 2012 closed with a loss-share agreement. Based on a review of recent deals, the FDIC is tending to offer loss-share agreements on commercial loans instead of on single-family mortgage loans.

It looks as though the number of FDIC-assisted transactions will remain low in 2012, with the year on track to be substantially below 2011 transaction levels.

Slow and Steady

Although overall deal volume has increased thus far in 2012, indicators still point to consistently slow activity in bank mergers and acquisitions—a far cry from the tidal wave of consolidation many had predicted. While credit is improving and the number of banks on the FDIC’s troubled bank list has decreased, the level of nonperforming loans is still higher than optimal. This higher level of nonperforming loans will continue to affect the level of bank merger and acquisition activity in 2012.

How to Get a Deal Done


The market for mergers and acquisitions among financial institutions has been nearly non-existent this year. Paul Aguggia, who heads the Financial Institutions Group for Kilpatrick Townsend & Stockton in Washington, D.C., talks about why that is and how to handle the formidable challenges of dealing with regulatory and shareholder concerns when it comes to M&A.

Why have we seen so few M&A deals this past year?

First, it’s the depressed stock price for both the target and the acquirer.  Emotionally, it’s very difficult to proceed when you feel as if you’re selling at the bottom.  For acquirers, a lower price means less buying power. Also, the regulators are delving deeper into pro forma capital levels as well as overall risk: Is there too much concentration of risk in a particular area? Do you have the resources to handle the risk of an acquisition? Regulators can signal concern early in the process.  Plus, there is due diligence. It’s difficult to get your arms around your own loans much less somebody else’s. Due diligence has become more important and more difficult. It’s more difficult to get comfortable with the risks and to price the transaction appropriately.

What advice do you have for potential acquirers and targets given these difficulties?

There is a fair amount you can do to review whether a partner is a good potential fit. You can conduct preliminary financial due diligence to see what a pro forma balance sheet and income statement might look like. You can have a discussion with regulators, usually on a no-names basis.  You can get the advice of lawyers and other professionals to determine if the deal makes sense financially and is likely to obtain regulatory approval. You can do, in effect, “pre-due diligence” before you devote any material resources to a potential acquisition.

For targets, if you’re not going to get top dollar for your institution, does that matter, if you’re taking stock in what might be a better company combined? As difficult as it might be to hear, don’t get too hung up on price. It’s not going to get easier to get these deals done and, in the meantime, you may lose potential acquirers.

What effect, if any, do you see activist investors having on the M&A market?

With regard to smaller institutions, activists are going to be very concerned about bad acquisitions. They would define bad as being overly dilutive on a book value basis and not picking up enough earnings to make it worthwhile, not to mention they might consider the risks from an operational and organizational standpoint as being unacceptable.  Investors want to see financial institutions stick to what they know. Many don’t think certain banks are suited for expansion through acquisition. We are hearing many of them say: “Don’t do anything silly, like an acquisition.” On the target side, we’re seeing activist investors anxious for an exit strategy, especially for smaller companies with limited stock liquidity. In short, I do think activists play some role in the M&A market.

What advice would you have for dealing with activist shareholders?

Not all activist shareholders are created equally. Some are more reasonable and patient than others. My advice is, don’t bury your head in the sand. Get advice about what you can say in a meeting or in public reports that shares elements of your strategy. Shareholders don’t like surprises.  Most investors want to know management and the board are focused, understand their concerns and don’t have a buy-at-all-costs mentality when it comes to expansion and mergers.

How should you approach regulators about an acquisition?

I think it’s important to have an open dialogue with regulators about your business plan.  They are not going to give you approval on the spot to engage in a transaction. If you let them know an acquisition is something you might want to do, many regulators will give you guidance. Regulators in many cases think consolidation is a good thing. But they want to see acquisitions done that reduce risk, not add risk, to the financial system.

Do you think smaller institutions are effectively precluded from being acquirers because of regulatory or compliance issues?

No, as long as they can make the expansion case with conviction and communicate effectively with their shareholders and regulators.  The ability to communicate a compelling case can be tougher when you don’t have economies of scale, which are more common with companies with more than $1 billion in assets—but I do think transactions are possible for smaller banks.