Trends to Watch: Fintech M&A

Can we expect a lot of M&A activity in the fintech space in 2022?
The tailwinds are there for a big year, according to Geddes Johnson, managing director at Goldman Sachs Group. In this video, he explains the signals he’s seeing, along with his projections for special purpose acquisition companies, or SPACs. Johnson also predicts if this will be a strong year for strategic buyers, and whether banks will be active fintech acquirers.

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.

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 and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA20.

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.

The Risk of In-Market Mergers

While only 20 percent of M&A deals in the past five years were in-market, banks considering this strategy could benefit greatly from this plan. However, there are special risks that can arise from a merger of this kind.

In this video, C.K. Lee of Commerce Street Capital explains both the pros and cons of in-market mergers by addressing these questions:

  • Why do in-market mergers?
  • What should you consider before agreeing to an in-market merger?
  • What sort of cost savings and earnings accretion should you expect?
  • What are some possible drawbacks to in-market mergers?

Current M&A Trends and Implications

Bank and thrift merger and acquisition strength continued in the first quarter of 2015, with transaction volume essentially the same as the first quarter of 2014. A notable trend was the continued strengthening of transaction pricing, with 2015 transaction multiples at the highest levels since 2008.


Source: SNL Financial; transaction data through March 31, 2015

What is Driving Transactions?
Many of the factors driving the current M&A cycle have been well documented and remain largely unchanged—improving industry fundamentals, increased regulatory costs, net interest margin compression in a low rate environment, industry overcapacity, and economies of scale. While those themes have been playing out in various forms for several years, some additional themes are emerging that are significantly impacting the M&A environment:

The advantages of scale are translating to a significant currency premium. For years we have seen a significant correlation between size, operating performance and currency strength. Lately, that trend has become a significant currency advantage for institutions with greater than $1 billion in assets and resulted in smaller institutions being constrained in their ability to compete for acquisition partners because of a weaker valuation. The chart below details current price to book and price to earnings multiples for publicly traded banks and thrifts based on asset sizes.


Source: SNL Financial; market data as of April 10, 2015

Net interest margin revenue challenges and uncertainty about the timing and magnitude of a Federal Reserve rate increase have placed pressure on bank stock performance. After recovering from the depths of the Great Recession, the banking industry experienced significant improvement in asset quality, capital levels, operating performance and earnings growth from 2011 to 2014. This translated to significant stock price performance, evidenced by banking stocks outperforming the overall market by nearly 30 percent on a cumulative basis during 2012 to 2014. However, beginning in early 2014, bank stocks have largely underperformed, mainly as a result of decelerating revenue and earnings growth and an uncertain outlook for Fed rate hikes. The result has been an alignment of buyers and sellers as buyers have utilized acquisitions to continue to increase revenues and sellers (smaller banks in particular) have concluded that a strategic partnership with a larger institution is the best method of delivering shareholder value.


Source: SNL Financial

Increasing M&A multiples have contributed to increased capital issuance. Increased transaction multiples is resulting in more goodwill creation, a higher likelihood of tangible book value dilution and a reduction in regulatory capital ratios. Acquirers are responding by issuing capital in what has been a favorable capital raising environment over the past several years due to a combination of strong price/earnings multiples and low interest rates. The banking industry has taken advantage of the favorable environment by issuing common and preferred equity and senior and subordinated debt. While some of the issuance has been focused on redeeming the government’s TARP/SBLF money, refinancing debt, and general corporate purposes, recent issuances have clearly been focused on merger activity. In reviewing offering documents, over half of issuers since the beginning of 2014 have indicated acquisition funding as a potential use of proceeds.

Merger and acquisition multiples have been increasing and 2015 will continue to be a favorable environment for M&A activity as the industry weighs the impact of potential rate increases and buyer and seller interests continue to align. Forward looking institutions have been raising capital to position themselves to be opportunistic buyers when strategic opportunities become available and sellers are taking advantage of a more favorable pricing environment.

Why Big Banks Aren’t Merging

4-20-15-Al.pngOutside of banking, really big M&A deals appear to be back in vogue. For instance, Finnish telecom-equipment maker Nokia is in advanced talks to buy France’s Alcatel-Lucent, a deal touted by The Wall Street Journal as one that creates “a global networking behemoth” to rival Sweden’s Ericsson and China’s Huawei Technologies. This comes on the heels of Royal Dutch Shell announcing its intent to acquire BG Group for nearly $70 billion. According to a piece by Stanley Reed and Michael J. de la Merced on the New York Times’ DealBook, “if completed, the sale would be a rare bright spot for energy deal makers, as oil and gas companies have largely hunkered down while petroleum prices have plunged… Potential sellers have been leery of making deals during what they consider a temporary dip, creating an often unbridgeable gap with interested buyers.”

Indeed, as I look at these non-bank deals, I’m drawn to several parallels to M&A activity in our industry. For example, figuring out when a bank should be a buyer—or a seller—and who presents the most attractive partner, is a major hurdle. For the multi-nationals, determining how and where to position a combined entity is huge. The same might be said for deals like the one struck by Nashville, Tennessee-based Pinnacle Financial Partners for CapitalMark Bank & Trust in Chattanooga. While much smaller, the fact that Pinnacle felt it was time to do their first deal in eight years shows that knowing thy neighbor pays off, as does knowing the market within which you look to lead.

I see another parallel between non-bank and bank mergers. There is speculation that the size of Shell’s deal could inspire some wavering potential sellers to pursue deals. Indeed, Reed and de la Merced write that advisers expect more acquisitions to be completed this year, particularly once oil prices show more stability. Perhaps that’s wishful thinking on the part of the advisers? After all, they are paid when transactions happen. Certainly BB&T’s announced acquisition of Susquehanna Bancshares last November and City National Corp.’s announced sale to Royal Bank of Canada in January sparked similar thoughts that more big bank deals were on the horizon. However, no such deals have been struck so far.

In this case, the banking world presents a whole other proposition in M&A than other industries. All banks are heavily regulated, and regulators can present a significant hurdle. Just look at M&T Bank Corp.’s efforts to close on its deal for Hudson City Bancorp. That transaction continues to be postponed, thanks to the Fed not making a decision on its merger application. It’s been about 1,000 days and counting since the deal was first made public. Personally, I wonder what’s been going on in Washington all this time—because I’d be shocked if the two institutions haven’t addressed the concerns of the government by now.

Finally, major international banks already are so large, that regulators likely will block any big bank combinations at this point. Federal law prohibits any bank from obtaining more than 10 percent of total U.S. deposits or more than 30 percent of a single state’s deposits. But smaller, regional banks could pare up and presumably achieve significant cost savings with the larger scale. They may be waiting for the right deal to come around, and so are we…

Stressed Into Selling?

3-18-15-Al.pngLast week, the largest U.S.-based banks passed the Federal Reserve’s stress tests. These results suggest each institution has sufficient capital to weather a significant financial shock. While the largest institutions in the U.S. remain, for the most part, on the sidelines when it comes to bank M&A, the test itself had me thinking about merger activity for the balance of the industry—roughly 6,600 organizations in total. Depending on the complexity of one’s business model, could modeling various economic conditions help a bank’s board to anticipate potential challenges and opportunities?

Banks above $10 billion in assets are required to conduct company-run capital stress tests, per the Dodd-Frank Act.  Banks below that are not. But what if they did anyway? I know for a fact that many of the banks below $10 billion do undergo the exercise not only for the sake of capital planning, but for other reasons as well. While stressing a smaller bank would certainly be expensive and time consuming, I see the exercise as valuable for many banks. With a bank’s capital tested, it strikes me that a follow-on to the results is a conversation about where the business might grow or expand and to shore up any vulnerabilities. For some, such a candid assessment of its strengths and weaknesses should lead to a discussion about a merger or acquisition, since M&A remains a principal growth strategy. So let’s play out a few scenarios.

Imagine a $2 billion asset bank with a significant commercial real estate exposure decides to shock its portfolio against various economic scenarios to make sure (1) it has sufficient capital and (2) it is generating sufficient return for the risk it takes on. While stress testing is primarily a risk management exercise, the results of the test might raise all kinds of questions, including whether or not the bank should remain independent, find a merger partner or consider staging an exit.  Admittedly, I have a hard time imagining that a bank would want to sell just because it can’t survive a worst case scenario. I do, however, think the results might reveal profitability weaknesses and make obvious potential problems with certain business lines that may not be fixed solely through “organic” means.

Alternatively, consider a similar-sized bank with a robust and diverse lending platform along with a proven credit culture. Testing its capital might reveal a credit engine running smoothly. Such a result could encourage the bank’s board to more actively pursue growth whether through organic means or mergers and acquisitions.

It strikes me that a number of factors are driving today’s bank consolidation: low valuations, lack of capital access, margin compression and slow loan growth. Given that the results of last week’s tests show the biggest players in our space are at least adequately capitalized and in a position to take on new risk, doesn’t it make sense for smaller banks to “plan for the worst and hope for the best” as they consider their future?

Merger Integration: The Hardest Part of Any Deal

2-23-15-Dinsmore.pngThe closing documents are signed, and the merger certificates have been filed. Some may think that’s when the hard work of integrating the deal really begins for a financial institution, but hopefully that is not the case. The best results happen when management envisioned this day from the beginning and began implementing a well-thought-out strategy as soon as the deal was announced. Although full integration will take two to three years to complete, here are five factors to help ease the pain of transition and integration.

Integration Team
First and foremost, the buyer must carefully select its integration team
, preferably before or early in the acquisition process. Individuals chosen should be some of the acquiring institution’s best employees in their areas of expertise, including human resources, IT, compliance, business development, marketing, training personnel, and member(s) of senior management. This team will be responsible not only for the conversion of systems, but the conversion of culture and the branding of the target. Accordingly, this front line must understand its own institution. Because the team will have access to the target between sign and close, they also will be in the best position to head off issues prior to closing, particularly with regard to employee and customer retention. The team should include employees from the target once an agreement is signed and both sides are working towards closing.

Integration Planning
As early as possible, the integration team should start meeting to detail and schedule every task necessary to integrate the institutions. By creating a plan and assigning team members to tasks, issues should be identified and rectified more quickly.  Management must stay involved to make sure no area of the planning is getting bogged down or slighted.

One element of planning that is both difficult and critical is integration into the buyer’s culture. Plans for ongoing training and management leadership efforts to bring new employees into the fold should not be overlooked as part of the overall strategy. Top management should budget time with the target employees prior to the consummation of the transaction and then be visible for a substantial period of time following closing. Open communication will help lessen target employees’ fear of the unknown and help educate them on the culture, brand and retail strategy of their new organization. Time spent planning and implementing the integration of people will be nothing but beneficial to the merged institution.

Employees of the target bank are usually very nervous about the changes and the future. It is important to the success of the transaction that the buyer identifies the employees it wants to retain. This means addressing personnel and position uncertainties early in the process and paying attention to employee emotions. The buyer wants to avoid losing the best employees, and their loyal customers, or having them poached by other institutions. Avoiding the distractions of water cooler speculation will help smooth the process. In order to try to maintain some stability at the target pending closing, stay bonuses can be a useful tool, along with severance arrangements for those who stay through closing but might not continue as employees post-closing.

Data Conversion
Another important aspect of integration planning is the scheduling of the data conversion. Upon execution of a letter of intent, the buyer should be in contact with their data processor to discuss and schedule the conversion. If there are concerns about discretion, have them sign a confidentiality agreement. Knowing the conversion date may drive numerous deal terms and set a goal for a closing date. Be aware also that many processing companies will not schedule a conversion in November or December, so you may need to factor that into the plan. Though most financial institutions hope not to run dual systems, sometimes it is unavoidable due to conversion scheduling.

The hope in any acquisition is that good customers remain with the new, combined institution, and branding the new entity is essential to that effort. Customers need to believe that the new brand is as good as or better than the previous one. In order to achieve that, a marketing and branding strategy must be prepared early in the integration process and retail employees, both old and new, should be included in the implementation. The retail front line is integral to maintaining customer loyalty. Again, robust and consistent communication is the key to success.

Keeping these considerations in mind when creating an integration plan can help address issues before they overshadow the deal and create a smooth transition to the new institution.

Don’t Sell the Bank

2-18-15-Al.pngI recently read a report from FIG Partners, an investment bank, that says “M&A pricing is actually much stronger than investors realize given the fact the capital levels are twice—or at least significantly higher—than the past cycle and now price-to-tangible book values are rising.” So if pricing is, in general, improving from a seller’s perspective, it is easy to see why a bank’s board of directors would consider putting the bank up for sale.

But my question is: Why sell now when better times might be ahead?

True, addressing this issue largely depends on how the institution is positioned, geographically, by product line and yes, asset size. Further, I realize a bird in hand is worth two in the bush, and this wait-and-see approach is one that a number of advisers warn boards from taking. However, while the pool of potential buyers is larger than previous years, I don’t see it as aggressive as some would lead you to think.

Still, figuring out when a bank should be a buyer—or a seller—has been on my mind since the Royal Bank of Canada announced a deal for “Hollywood’s bank,” City National Corp., for $5.4 billion. This is the most expensive large U.S. bank deal announced since the financial crisis, based on a price-to-tangible book value of 262 percent. Since that announcement, various media outlets have speculated that buyers will pay a premium for trophy properties like City National. Many anticipate banks that cater to the wealthy will be front and center. But I’m not so sure that institutions with a similar clientele, like San Francisco-based First Republic Bank, should sell, even if approached with a huge multiple.

If you’re not familiar with First Republic, I find the bank’s story fascinating. Jim Herbert founded the bank in 1985, sold it to Merrill in 2007 for 360 percent of book value, took it private through a management-led buyout in July 2010 after Merrill was acquired by Bank of America, then took it public again in December through an initial public offering. A few years ago I sat down with Jim in their New York City offices and came away impressed: not only is the bank solely focused on organic growth, it’s also focused solely on private banking.

So I wonder. Members of First Republic’s board have a fiduciary responsibility to shareholders; however, does a short-term premium trump sustained long-term potential?  For a bank that caters to the wealthy, business executives and owners, I’m sure the U.S. Department of Labor’s announcement that the U.S. economy created 257,000 jobs in January—making this the longest stretch of sustained monthly growth since the early 1990s—was well received. While the unemployment rate ticked back up to 5.7 percent, from 5.6 percent in December, The Wall Street Journal reports that the climb was likely because more Americans said they were looking for jobs, a sign of growing confidence.  As the tide begins to rise, why sell the proverbial boat?

Moreover, a recent report from Deloitte’s Center for Financial Services says that, “the encouraging M&A activity seen in 2014 is likely to continue through 2015, driven by a number of factors: stronger balance sheets, the pursuit of stable deposit franchises, improving loan origination, revenue growth challenges, and limits to cost efficiencies.” However, their 2015 Banking Outlook also acknowledged that “as banks move from a defensive to an offensive position to seek growth and scale, they should view M&A targets with a sharper focus on factors such as efficiencies, growth prospects, funding profile, technology, and compliance.”

So rather than consider an exit, isn’t now the time to double down on your growth efforts?