Analyst Notes


From recent analyst reports:

Analysts at Keefe, Bruyette & Woods report strong commercial and industrial lending:

Excluding consolidation, loan growth has been more measured at 7.1 [percent] annualized, but still solidly ahead of last quarter’s pace. 

For the quarter, C&I remains the largest source of growth for banks, now up 13.4 [percent] in total, modestly above last quarter’s 11.7 [percent] pace. Consumer lending continued to expand at a solid pace, which we believe may have been aided by increased spending through the holiday season. For the quarter, consumer balances grew 9.9 [percent] across all banks, led by credit cards.

Real estate lending edged higher, benefiting from increased residential mortgage and CRE volumes.  For the quarter, CRE [commercial real estate] grew 3.8 [percent] over 3Q12 levels. While modest, the growth does reflect the first quarter of positive CRE growth at large banks since the end of 2008, suggesting that these banks may have turned the corner on CRE lending after running off these portfolios for nearly four years.

Analysts at Raymond James & Associates predict consolidation over the next five to 10 years, rather than a large wave of acquisitions:

With many of the mega and large regional banks more focused on capital repatriation to more normalized levels (stress test results due in March), meeting Basel III capital standards (countercyclical + SIFI buffers), and improving their valuations, we believe M&A activity in 2013 to again remain largely relegated to smaller deals for banks with assets of $1 billion or less. Indeed, we note that of the 788 announced acquisitions from 2009 through 2012, 705 (89 percent) were for banks with less than $1 billion in assets. With the view that greater scale is needed in the new banking paradigm to combat the costs and time associated with implementing new rules associated with Dodd-Frank, we see more management teams/boards of smaller banks “throwing in the towel” in coming months and years. To this end, we note of the 7,181 FDIC-insured institutions as of 9/30/12, 6,522 (91 percent) had assets under $1 billion, which in our view will continue to be where the majority of deals come from in the nearer-term. Still, we wouldn’t rule out a handful of larger deals similar to what we saw in 2012 (like M&T’s acquisition of Hudson City or FirstMerit’s acquisition of Citizens Republic).

In our view, we see meaningful industry consolidation over the next 5-10 years rather than a large wave that occurs over just a few given our belief that banks are sold and not bought. Using this logic, coupled with an improving (albeit slowly) economy, modestly better asset quality, and shades of loan growth, we believe an M&A target’s view of franchise value will remain above that of potential acquirers. Put another way, we expect the disconnect between buyers’ and sellers’ expectations to remain wide but slowly move closer to equilibrium over time.

SNL Financial reports few conversions of mutuals:

Only 13 conversion deals were completed during 2012, significantly down compared to 20 deals in 2011 and 24 deals in 2010. Seven of the 13 deals were standard conversions and six were second-stage conversions.  As for standard deals, one theory maintains that mutuals specializing in single-family mortgages without too much of a capital cushion will need to look for equity infusions, possibly in the form of a conversion, so as to diversify revenue and minimize interest rate risk. That theory has not panned out so far, but if credit quality worsens, some companies may opt to go public. Excluding the publicly traded [mutual holding companies], pending conversions and pending mergers, 149 mutual thrifts have more than $100 million in total assets, hold at least two-thirds of their loans in single-family mortgages and carry less than 15 [percent] tangible equity to tangible assets.

Bank acquisitions rise in first quarter, but not by much


Top dealmakers include Sandler O’Neill & Partners, Raymond James & Associates and Keefe, Bruyette & Woods 

Top dealmakers by volume

Top dealmakers by number of deals

There weren’t a lot of fish to be had, but Sandler O’Neill & Partners took the bigger fish. With 34 total bank and thrift acquisitions worth just $2.3 billion in the first quarter, the firm’s investment bankers were the top dealmakers by volume in the first quarter, after handling the $1 billion Comerica Inc. acquisition of Sterling Bancshares, Inc., according to SNL Financial.

race-track.jpgSenior Managing Director Jimmy Dunne III of Sandler O’Neill was ranked number one with two deals worth a total $1.5 billion: He handled Comerica as well as People’s United Financial’s $489 million acquisition of Danvers Bancorp., both announced in January.

He was quickly followed by John Ziegler and Liz Jacobs, both of Sandler O’Neill & Partners, who both worked on the Comerica deal as well.

Tom Mecredy of Raymond James & Associates, Inc., and Jeff Brand and Steve Kent with Keefe, Bruyette & Woods, Inc., were the top bank deal makers by number of deals, with three deals each.

Deal volume improved in the first quarter compared to last year, with 34 deals done compared to 26 during the same quarter last year. But pricing remains lower than historic levels, with the average deal price to book value at 103.2 percent in the first quarter, down from 123.7 percent a year ago.

Last year, there were more than 170 bank mergers and acquisitions announced worth about $12 billion, compared to 296 in 2006 worth $109 billion, according to SNL.

The Return of Bank M&A


Bank Director is expecting record attendance at our 2011 Acquire or Be Acquired conference which starts on Sunday, Jan. 30, in Scottsdale, Arizona, and the driving factor is probably more than the forecasted sunny skies and temperature in the low to mid-seventies. Bank merger and acquisition activity finally picked up in 2010 after two down years, and the outlook for 2011 is even better. 

It was extremely difficult to sell a bank in 2008 or 2009 because the recession brought about a significant deterioration in loan quality throughout the industry. It’s hard to put together a deal when neither buyer nor seller has confidence in their loan portfolios. The buyer worries that it could end up overpaying if the acquired institution’s loan book performs worse than expected after the deal has been consummated – and in a declining economy, asset quality tends to be a moving target. Meanwhile, the seller worries that the buyer’s currency in an all-stock deal could end up being worth less than it thought if that organization’s asset quality deteriorates unexpectedly after the transaction has closed.

As you would expect, M&A deal volume in recent years has reflected this pricing dilemma. There were 296 bank and thrift deals in 2006 with an aggregate value of almost $109 billion, according to the research mavens at SNL Financial in Charlottesville, Virginia. Total deal volume dropped slightly to 288 and the aggregate value more sharply–to $72 billion– in 2007. Then an economic tsunami washed over the U.S. banking industry and the M&A market practically disappeared. There were 144 deals in 2008 for a total of $35.6 billion and 120 deals for a paltry $1.3 billion in 2009.

The past year shows that the trend has begun to reverse itself, with a total of 176 deals for an aggregate value of approximately $12 billion, according to SNL.

Banks get sold for a variety of reasons in a normal economy. The institution’s financial performance could be lackluster and the board might lack confidence in management’s ability to improve its profitability, so it decides to reward long-suffering shareholders by selling out. Perhaps the CEO is retiring and the board doesn’t have a qualified successor in place. Or the institution might be a relatively recent start-up that had always intended to provide its investors with an exit strategy after it had been in business for a few years.

These are all valid reasons to put a bank up for sale, but that option becomes less viable in a recession when the board might not be able to find a buyer at a price that it’s willing to accept. But now that the U.S. economy seems to be on a more solid footing and the industry’s asset quality has finally stabilized, buyers and seller alike are more confident about doing deals. And the normal demand from potential sellers who were bottled up in 2007 and 2008 – when the recession acted like a cork – should help drive deal volume in 2011.

1q2011.jpg[To read more about the M&A market, check out the cover story, Eat or Be Eaten in Bank Director’s 1st quarter 2011 digital issue.]

I occasionally run into the misconception that bank CEOs and directors come to AOBA to do deals, but that’s not the case. Most bank M&A transactions are a local phenomenon involving institutions in the same or contiguous markets and are negotiated behind the scenes, often by the CEOs first and later by the boards of directors.

Most attendees come to this conference to learn. How do you determine a fair value for your institution? What are buyers looking for when they scout for acquisitions? Is this a good time to sell? How do you ward off a hostile takeover attempt if your board doesn’t want to sell?

Each year we try to put together an agenda that provides CEOs and directors with the kind of knowledge that will help them make better decisions. The event is taking place at the Hyatt Regency Scottsdale Resort at Gainey Ranch and will conclude on Tuesday Feb. 1. I’ll be spending most of that time talking to CEOs and directors, listening to presentations and trying to soak up some of that same knowledge (and a little sun, truth be told), which I will share in a post-conference blog.

So stay tuned!