Poll: Price Remains Obstacle to Deals

Brighter days are ahead for community banking, according to 68 percent of the more than 200 bank CEOs, board members and senior executives participating in a series of audience surveys at Bank Director’s Acquire or Be Acquired conference, held January 25-27, 2015, in Scottsdale, Arizona. The annual event, which focuses on bank mergers and acquisitions, was attended by more than 520 financial executives and board members, primarily bank CEOs and board members, representing more than 300 banks, the majority of which are headquartered in the central United States. Two-thirds of attendees represented banks with less than $1 billion in assets.

The crowd at the event revealed a strong focus on acquisition opportunities, with 60 percent indicating that their bank will most likely buy another financial institution in 2015, and 16 percent indicating plans to sell. The audience revealed a greater likelihood to participate in M&A in 2015 than the banking community as a whole: Bank Director’s 2015 Bank M&A Survey, conducted in September 2014 and sponsored by Crowe Horwath LLP, found that 47 percent planned to buy, and just three percent to sell, this year.

When asked about the biggest barrier for banks seeking an acquisition in today’s market, attendees cited high price expectations on the part of the seller, at roughly one-third. Attendees were also asked which part of the M&A cycle worries them most: 44 percent cited pre-deal considerations, including price and negotiating the deal. This trumps post-deal concerns, such as integration, cited by 36 percent of attendees. 


Thirty-four percent said that many targets don’t want to sell, underscoring that confident spirit that brighter days are ahead. Potential sellers may be willing to wait it out for a higher price. While the vast majority of the audience expressed confidence that they understand the value of their bank, 40 percent revealed they are not confident that their board knows what the bank is worth. 

On stage at the event, Rick Childs, a partner in Crowe Horwath’s financial advisory services group, said that price and an unwillingness to sell on the part of the target bank really fit hand-in-glove. Many banks don’t want to sell because they expect a high price. High dollar deals—those with pricing about 2.5 times tangible book value—receive a lot of attention, but “there’s a big chunk of deals that get done for less than tangible book value,” said Childs. The expectations of board members and shareholders may not align with those of the market.

There may be more buyers than sellers, but it’s not entirely a seller’s market. A track record of growth and profitability make for a more attractive seller. Almost half of the audience at Acquire or Be Acquired revealed that their primary reason to make an acquisition is to increase earnings per share. Childs said that investors have shifted focus to earnings potential, as opposed to worrying about tangible book value dilution as much, representing a positive step for the industry. Earnings are improving for banks, and targets are more attractive. “I think it’s the right focus to have on deals these days,” he said.

So how do you grow if your bank can’t find the right target at the right price? Not surprisingly, given the audience, 82 percent of attendees said that lending is the primary path to growth for their organization. The best opportunities for loan growth are in commercial real estate, according to 58 percent of attendees. Almost one-third cited commercial & industrial (C&I) lending, and 9 percent cited residential loans.


Commercial real estate loans have been steadily rising since the fourth quarter 2012, according to the Federal Reserve Bank of St. Louis, following a steep decline beginning in the fourth quarter 2008. C&I lending experienced a similar fall, but recovered more quickly. Recovery in the residential loan market has been unsteady.

Childs told the crowd that he sees pockets of the country where lending is picking up, as companies that were forced to live within their means during lean years look to expand and invest in their businesses. But demand hasn’t picked up everywhere. Almost half of the audience said that, aside from regulatory costs, constraints on loan growth, including weak demand, have the most negative impact on the profitability of their institution.

How Not to Waste Your Time in Strategic Planning

1-28-15-Naomi.pngBank boards are starting to take strategic planning seriously. The industry has returned to a modest level of profitability, and the boards at many small banks are wondering what the future holds for their institutions in an age of low interest rates and high levels of government regulation.

For many, the 4 percent or 6 percent return on equity that their bank promises to earn is not enough. Or perhaps the board managed to survive the financial crisis and many members are now ready to cash in their shares. Whatever the cause, more boards are asking about the value of remaining an independent entity versus selling or acquiring another bank, said investment bank Austin Associates Managing Director Craig Mancinotti, a speaker at Bank Director’s Acquire or Be Acquired Conference Tuesday in Scottsdale, Arizona. More than 800 people attended the three-day conference at The Phoenician hotel.

One of those who attended the conference is Arthur Johnson, chairman and chief executive officer at United Bank of Michigan in Grand Rapids, Michigan. Johnson is interested in starting a formal strategic process, with an independent moderator and an in-depth assessment of what the board’s goals are, now that many members of the closely-held bank board are over the age of 60. Most of the bank’s ownership lies with one family.

“I think the process has to become a little more formal than it has been in the past,’’ Johnson said. “I have a way of taking over meetings. Everybody knows my opinion counts but I have a hard time not letting my views come out first.”

When Austin Associates moderates a strategic planning retreat, each member of the board fills out in advance a brief S.W.O.T. analysis of the bank, which stands for strengths, weaknesses, opportunities and threats. Each member also lists the critical strategic issues facing the bank. To find out exactly what the board thinks and wants, Mancinotti recommends that management be excluded from the strategic planning sessions. Management’s input is still sought outside the sessions, but a director-only strategic planning session “is the best way to have unfiltered opinions,’’ he said.

As an introduction to the strategic planning retreat, Mancinotti gives a 30-minute to 45-minute overview of the economic and M&A environment, and he compares the bank’s performance to peers. That’s important so everyone is on the same page as to how the bank is performing. The board strategic planning session usually lasts six to eight hours, with a focus on developing key strategic priorities that management can then turn into a detailed action plan. The bank might need only two or three action items under each strategic priority, and all the different department heads should be involved in developing the action plan.

In order to make the goals a reality, the board should provide direction to management on how often, and when, management should report back to the board with progress toward the action items. It might be several times per year. “We are a big believer in reviewing [your strategic plan],’’ said Richard Maroney, Jr., managing director at Austin Associates in Toledo, Ohio. “You shouldn’t come up with a three-year plan and not look at it again for three years.” 

The bank’s M&A strategy should be a part of the strategic plan, and regulators should be informed in advance of the bank’s strategy. Regulators, just like shareholders, don’t like to be surprised. That should make the M&A approval process smoother.

If an acquisition is your goal, an investment banker can help the board identify a list of potential targets. Not all banks use an outside advisor for help with strategic planning, fearing that the advisor’s views will color the outcome. But regardless, the chief executive officer, not an investment banker, should make the first contact with potential targets and begin informal discussions. In fact, the board should understand that its role in the M&A process is to guide strategy, not initiate negotiations outside the board room.

Another good practice is to conduct a training session for the board to prepare for M&A. Is your board ready if it got an offer tomorrow? What if your number one target suddenly becomes available? An investment banker should be able to walk you through a hypothetical scenario. 

“You could waste a week just figuring out who has the authority to start the discussion,” Maroney said. “The first thing you should ask is: Are we ready to do M&A? What holes do we need to fill to be successful?” 

In the end, strategic planning can be a useful and productive exercise, as long as there is follow up and management knows to take the planning document seriously. 

This Is Not Your Granddad’s M&A

1-26-15-Naomi.pngDoing a bank M&A deal is nothing like it was just a few short years ago. The regulatory environment has changed substantially. The process takes longer and due diligence is much more involved than ever before, said speakers at Bank Director’s Acquire or Be Acquired Conference on Monday, an annual three-day conference in Scottsdale, Arizona, that attracted more than 800 attendees this year. 

While deal pricing has improved, as well as the sheer number of buyers and sellers in the market looking to do a deal, actually getting from transaction to completion is somewhat of a challenge, speakers said. For one, regulators are scrutinizing both buyers and sellers for any regulatory compliance issues. A few years ago, it wasn’t a big deal if a seller had some compliance problems.  It was assumed that the buyer would take care of them. That’s not always the case anymore, and sellers should try to clean up their problems, both from a regulatory standpoint and also to make themselves more valuable to potential buyers.

John Dugan, a partner at the law firm Covington & Burling LLP, and former comptroller of the currency from 2005 to 2010, said banks need to anticipate regulatory questions and potential delays as well as address with regulators how the bank will handle the increased compliance demands of becoming a larger institution, he said. Banks that reach the thresholds of $10 billion or $50 billion in assets following an acquisition will have adhere to  new sets of regulations. For example, at $10 billion in assets, banks must undergo stress testing and their debit fee income will be cut substantially due to a provision in the Dodd-Frank Act.

Dugan said his firm has seen an increase in Community Reinvestment Act protests following the announcement of a deal. Buyers and sellers should have at least a satisfactory rating on CRA exams.

 “It used to be larger institutions that were targeted, and now [advocacy] groups are going [after] smaller institutions,’’ Dugan said. Such challenges can delay the closing of an acquisition. Some compliance problems are especially serious.  “If there is a BSA (Bank Secrecy Act) issue at hand, it is almost certainly a deal killer,” Dugan said. 

Speakers at the conference emphasized the importance of talking to the bank’s regulators regularly to inform them of the bank’s plans to make acquisitions, and to inform them well in advance of a deal announcement to get a sense of whether the deal will be approved. Regulators will rarely say anything definitive, but could provide a good indication of potential problems.

“The days are gone of calling your regulator the night before a deal,’’ said Eric Luse, a partner at the law firm Luse Gorman PC, in Washington, D.C.

Regulators are less likely to share information with a buyer about a potential acquisition target than in years past, Dugan said. There was a time when  it was common for a buyer to send someone to attend board meetings of the seller after a deal had been signed, but regulators are increasingly asserting that practice is taking control over the organization before the deal is final, said John Freechack, a partner at Barack Ferrazzano Kirschbaum & Nagelberg LLP in Chicago. Regulators also are pushing back against deal language that protects a buyer by allowing a buyer to refuse the seller’s approval  of certain sized loans in advance of the closing of the deal.

The M&A process in general takes longer to complete. Al Laufenberg, a managing director at investment bank Keefe, Bruyette & Woods, said deals that took five to six months from announcement to closing a few years ago are now taking eight or nine months. Part of that is the longer timeframe to get regulatory approval. But buyers and sellers are spending more time on due diligence as well. Buyers are spending extra time scrutinizing other issues alongside credit quality, including cyber security policies and regulatory compliance, he said. Buyers may spend only two days on loan quality and 25 days reviewing cyber security and compliance with regulations, he said. 

Building in extra time to do a deal and ensure good regulatory relations could make a huge difference in successful deal-making. 

Fruits of Banking Not Equally Shared

1-25-15-Naomi.pngThe banking industry in general seems to be doing quite well, thank you. Profitability has risen in the past year. Banks overall have seen 20 straight quarters of improved credit quality. Loan growth is picking up. So all is good, right?

Investment bankers and attorneys speaking Sunday at Bank Director’s Acquire or Be Acquired Conference in Scottsdale, Arizona, said yes, but with big qualifiers. The benefits of an improved market have not been equally shared. Some banks are doing better than others. And low interest rates are putting pressure on banks to sell.

Small and mid-sized banks, those with less than $50 billion in assets, are actually outperforming the bigger banks, said Tom Michaud, the chief executive officer at investment bank Keefe, Bruyette & Woods. The sweet spot seems to be banks between $5 billion and $50 billion in assets. Their profitability metrics are higher, they are growing loans at a faster pace, and they command higher pricing multiples compared to bigger banks, he said. Part of that is the sheer size of the regulatory fines bigger banks are still getting hit with, seven years after the start of the financial crisis.  Plus, big, global banks must maintain higher capital levels than smaller banks, which impacts their profitability. “The small-cap banks grow faster,” said Michaud, and on a relative basis, “they earn more money.’’

But small cap is a relative term. Many of those attending the conference are directors or officers at banks below $1 billion in assets, and for them, pricing multiples can be a challenge unless they are in a good growth market and have strong earnings.

Those bank boards that manage to sell their banks at 1.5 to 2 times book value tend to be high earning banks with high loan to deposit ratios in or near a metro area, where much of the loan growth is occurring in the country, not in a rural area, says Curtis Carpenter, managing director at Sheshunoff & Co. Investment Banking. Size also matters. The median asset size for a bank that sold at two times adjusted book value since 2013 was $917 million, versus $213 million for a bank that sold at 1 to 1.25 times book, he said.

“Larger banks tend to be more profitable, but even more so, bigger sellers tend to attract bigger buyers,’’ he said.

Smaller banks are often less profitable and less efficient than bigger banks, which is leading some of them to sell to larger entities, especially since pricing for deals has improved in the last year, so they can make more money when they sell their banks than they could in prior years. Interest rates have stayed down longer than many predicted, which has kept pressure on net interest margins, the key metric for most community banks, which rely on loans to generate earnings. Low interest rates may also lead to more consolidation going forward, as banks search for better efficiency and growth through acquisitions.

“The reality is organic growth is tough,’’ said Chris Myers, the president and CEO of the $7.2-billion Citizens Business Bank in Ontario, California, who spoke at the conference. His bank is one of those in the “sweet spot” for higher valuations and higher profitability, but even he feels the pressure to grow. “A lot of banks are stretching to try to grow [loans] and do things they wouldn’t have done in the past,’’ he said, commenting on the competition for good loans. “ We are going to need to do some acquisitions.”

Bank M&A in 2015: Looking Ahead

In this video, Rick Childs of Crowe Horwath LLP highlights findings from Bank Director’s 2015 Bank M&A survey, sponsored by Crowe Horwath, which reveals a notable gap between those banks looking to sell and banks looking to buy.

Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2015 Crowe Horwath LLP.

Private Equity Gets Ready to Exit

A few private equity firms stepped in during the financial crisis and recapitalized struggling banks, but what is private equity doing now that bank stock prices have largely improved? Some private equity firms already have exited their investments, making hefty returns by doing so. Bank Director magazine talked to investment bank Hovde Group’s Joe Fenech and Kevin Fitzsimmons, both managing directors in the equity research department, about recent research the two conducted on private equity ownership of banks and the potential for future M&A activity.

You’ve done some research on private equity ownership in banking companies. What did you find?
Joe: Private equity firms were obviously a sorely needed source of capital for smaller banks during the downturn, and the track record for private equity would seem to suggest that these firms will remain involved for up to five to seven years at most. And, with most of these investments having been made roughly three to five years ago, we think the exiting process for private equity could result in a sale of the company or some other event that is likely to have a meaningful impact on the stock.

What are the possible outcomes for banks with private equity ownership?
Joe: We cite three examples that illustrate the different paths that these PE firms may elect to take to exit their position. First, Sterling Financial Corp. was a classic, textbook-type PE opportunity. PE invested at $13 per share in 2010, they oversaw the cleansing of the balance sheet, and the company was then sold to Umpqua Holdings Corp. earlier this year for $33 per share. Second, in the case of BankUnited Inc., the PE firms partnered up with a highly respected management team, invested at $10 per share in May 2009, and following an early 2011 IPO at $27 per share, opted to divest its stake gradually, and was completely out of the shares by late 2013.

Kevin: And third, in the merger between Yadkin Financial Corp. and VantageSouth Bancshares Inc., we saw PE holders opting to remain with the company through the merger. This could suggest an extended investment time frame or maybe that the PE firms see considerable value still to be realized.

Haven’t there been private equity investments that didn’t do well?
Kevin: In one example, CommunityOne Bancorp has two main private equity backers that have a cost basis of $16 per share, and today the shares trade at about $11 per share [as of mid-November 2014], so it most definitely is underwater as of today. That said, management would emphasize that this was a longer-term project and that private equity was very aware of that from the start.

What do you predict will happen to banks that have private equity ownership in the next year or two?
Joe: A lot of these stocks are at or near post-crisis highs and some of the PE positions are sitting at substantial gains. At the same time, regulators appear to be softening their stance on M&A, particularly for mid-cap acquirers. If we’re right, and the pace of M&A continues to accelerate, it only furthers the notion that we’ll probably see resolution of several of these PE investments over the next couple of years.

Which banks have the highest potential to sell?
Kevin: One example is Palmetto Bancshares Inc., although we should note that the possibility of a sale is just one of the reasons we’re positive on the name. PLMT has a very attractive franchise and management has done an impressive job overhauling the company, and we think it’s possible that private equity could be open to an exit via M&A.

Joe: Stonegate Bank in Florida is another one, although not tied to PE involvement. We think Florida as a whole will have a pickup in volume of M&A deals and pricing given its increasing return to health. South Florida, in particular, is on fire.

What does the future hold for more private equity investments?
Joe: Private equity firms tend to make most of their investments during times of acute stress, so with the stocks nearing post-crisis highs, we think the question is more about how private equity looks to exit these stakes, as opposed to making new investments.

What to Expect in 2015 for M&A

1-16-15-Al.pngFrom the strategies and mechanics behind a transaction to the many lingering questions regarding industry consolidation, regulatory burdens and how to build long-term value, Bank Director’s Acquire or Be Acquired Conference Jan.25-Jan. 27 (affectionately known as AOBA) provides officers and directors with three days to explore acquisition strategies and financial growth options with their peers.

Now, I am not one to ignore the past when preparing for the future. One of the common themes from last year’s conference was that many bankers attending the conference were looking to cure profitability challenges through some kind of merger or acquisition activity. In addition, some of the trends I took note of were, in no particular order:

  • Many CEOs were sweating margin compression, efficiency improvements and business model expansion in the context of their current environment;
  • Numerous statistics and financial models made clear that larger banks benefit from “economies of scale” in terms of better profitability and higher stock values than smaller banks;
  • Most investors want to invest in buyers, not try to pick the sellers;
  • The Bank Secrecy Act (BSA) and anti-money laundering issues derailed and/or prevented quite a few deals from ever seeing the light of day; and
  • The term “merger of equals” may be a misnomer; however, there were real benefits of a strategic partnership between similar-sized banks looking to stay relevant and achieve scale.

So as the clock ticks closer to this year’s program, allow me to share what I anticipate at AOBA. Many of the regulatory hurdles to deals and enhanced regulatory scrutiny remain in place. With increased scrutiny of deals at the regulatory level, I will be particularly interested to hear how various CEOs prepare their board for dealing with regulators, shareholders and management, all while managing the numerous professionals involved in an M&A deal (e.g. the lawyers, accountants, and investment bankers).

Yes, the benefits of economies of scale will continue to drive consolidation going forward. Nonetheless, I do not think mergers of equals will be as much of a focus of the conference as last year. Instead, I anticipate more conversations about public offerings as stock values increase and investors become friendlier to banks. One bank CEO who is scheduled to speak at the conference, Independent Bank Group’s David Brooks, had a successful IPO that exceeded expectations. To this end, as 2014 was the year of the IPO, 2015 might well follow suit.

Likewise, I know many potential acquirers are keen to limit market risk and are interested in learning how some of the more successful acquirers of late have managed (think ConnectOne Bancorp in Englewood Cliffs, New Jersey, and IBERIABANK Corp.in Lafayette, Louisiana, to name a few banks sending CEOs to AOBA).

Whether it is making the hard decision that now is the time to sell or buy another bank to improve operating leverage, earnings, efficiency and scale, I know that the 510+ bank CEOs, chairmen and board members that have already registered to join us at The Phoenician hotel in Scottsdale, Arizona, will be challenged by their peers to re-think what’s possible in 2015.

M&A 101 for the Board

Whether your financial institution is looking to buy or sell, the board of directors has several important responsibilities during an M&A transaction. In this video, Steve Kent of River Branch Capital LLC outlines the board’s role in the M&A process including negotiations, due diligence and after the deal is done.

Bigger Banks More Focused on M&A

Want to buy another bank? Get in line. The number of potential buyers far exceeds the number of banks willing to sell—but bigger banks are much more likely to focus on mergers and acquisitions (M&A) than small banks. Bank Director’s 2015 Bank M&A Survey, sponsored by Crowe Horwath LLP, queried more than 200 bank directors and senior executives to uncover the opportunities and challenges in today’s deal environment.