The Myth that Binds Banks to Their Payment Processors


payment-7-22-19.pngBanks are losing a heavyweight fight, one in which they did not know they were participating. Their opponent? The ever-growing giants of debit card processing in an ever-shrinking ring of industry consolidation.

Over the past few years, interchange income has surpassed all traditional types of deposit-based fee income, making it the number one source of deposit-based non-interest income. But in order to maximize that income, interchange network arrangements must be effectively managed and optimized. Executives must sift through misinformation to consider several critical issues when it comes to protecting interchange income.

Many bankers aren’t aware they can choose which vendors process their customers’ debit card transactions from the point-of-sale and believe they are forced into selecting the PIN-based debit card transaction network provided by their core or EFT processor. This couldn’t be further from the truth.

Debit card transaction networks have varying negotiable switch fees, increasingly complex expense structures and several types of incentive offerings for transaction routing loyalty or priority. Most importantly, these vendors offer differing interchange income pay rates; some even support PIN-less routing, which negatively affects the interchange income bank card issuers can earn for certain transaction types. This means bankers must thoroughly evaluate their options to find a partner that can generate above-average interchange profit.

Oftentimes a bank’s core or electronic funds transfer (EFT) processor offers the least-competitive option when compared to other PIN networks. Since the Durbin Amendment awarded merchants the power of the card transaction network choice, EFT processors are negotiating with merchants to get as many transactions on their network as possible. The processors do this by offering lower PIN and PIN-less rates than their competitors.

Of course, if a merchant can divert less of the purchase amount in interchange with the bank, then they absolutely will. The merchant simply chooses the transaction-routing options that are less expensive to them, and pays less to the bank. In this type of situation—where it appears that banks have little control—what can a banker do?

One way for bankers to exert influence is by limiting network choices on their debit cards. Banks should limit the PIN networks available for routing their debit card transactions to a maximum of two. At the same time, banks must select the best two-network combination to force the merchants’ hands, providing the best rates possible. This tactic tips the power scales back toward the card issuers.

Some processors are creating networks to compete with Visa and Mastercard for routing dual-message, or signature transactions. These signature-routing networks, being rolled out by PIN network processors, will likely be structured to appeal to merchants in attempts to win as many transactions as possible. As one might guess, this will further pressure bank income.

Most recently, it’s also been observed that several networks setup for ATM-only routing by their participating issuers were gaining PIN point-of-sale transactions from merchants. They did this by allowing PIN-less routing and simply being present as a network option on the issuers’ debit card network arrangement. Both of these tactics create confusion for banks, and build a case for closely monitoring network performance.

Banks participating in their core or EFT processor’s PIN network should take a close look at how their PIN-based interchange income has performed over the past two to three years. They should compare their current PIN income rates to the rate averages in the FED Interchange Study, fully considering the historical trend being reviewed. This can be a great first step for banks to regain some control of their interchange income.

Takeaways from the BB&T-SunTrust Merger


merger-2-27-19.pngIn early February, BB&T Corp. and SunTrust Banks, Inc. announced a so-called merger of equals in an all-stock transaction valued at $66 billion. The transaction is the largest U.S. bank merger in over a decade and will create the sixth-largest bank in the U.S. by assets and deposits.

While the transaction clearly is the result of two large regional banks wanting the additional scale necessary to compete more effectively with money center banks, banks of all sizes can draw important lessons from the announcement.

  • Fundamentals Are Fundamental. Investors responded favorably to the announcement because the traditional M&A metrics of the proposed transaction are solid. The transaction is accretive to the earnings of both banks and BB&T’s tangible book value, and generates a 5-percent dividend increase to SunTrust shareholders. 
  • Cost Savings and Scale Remain Critical. If deal fundamentals were the primary reason for the transaction’s positive reception, cost savings ($1.6 billion by 2022) were a close second and remain a driving force in bank M&A. The efficiency ratio for each bank now is in the low 60s. The projected 51 percent efficiency ratio of the combined bank shows how impactful cost savings and scale can be, even after factoring in $100 million to be invested annually in technology.
  • Using Scale to Leverage Investment. Scale is good, but how you leverage it is key. The banks cited greater scale for investment in innovation and technology to create compelling digital offerings as paramount to future success. This reinforces the view that investment in a strong technology platform, even on a much smaller scale than superregional and money center banks, are more critical to position a bank for success.
  • Mergers of Equals Can Be Done. Many have argued that mergers of equals can’t be done because there is really no such thing. There is always a buyer and a seller. Although BB&T is technically the buyer in this transaction, from equal board seats, to management succession, to a new corporate headquarters, to a new name, the parties clearly went the extra mile to ensure that the transaction was a true merger of equals, or at least the closest thing you can get to one. Mergers of equals are indeed difficult to pull off. But if two large regionals can do it, smaller banks can too.
  • Divestitures Will Create Opportunities. The banks have 740 branches within 2 miles of one another and are expected to close most of these. The Washington, D.C., Atlanta, and Miami markets are expected to see the most branch closures, with significant concentrations also occurring elsewhere in Florida, Virginia, and the Carolinas. Deposit divestitures estimated at $1.4 billion could present opportunities for other institutions in a competitive environment for deposits. Deposit premiums could be high.
  • The Time to Invest in People is Now. Deals like this have the potential to create an opportunity for community banks and smaller regional banks particularly in the Southeast to attract talented employees from the affected banks. While some banks may be hesitant to invest in growth given the fragile state of the economy and the securities markets, they need to be prepared to take advantage of these opportunities when they present themselves.
  • Undeterred by SIFI Status. The combined bank will blow past the new $250 billion asset threshold to be designated as a systemically important financial institution (“SIFI”). While each bank was likely to reach the SIFI threshold on its own, they chose to move past it on their terms in a significant way. Increased scale is still the best way to absorb greater regulatory costs – and that is true for all banks.
  • Favorable Regulatory Environment, For Now. Most experts expect regulators to be receptive to large bank mergers. Although we expect plenty of public comment and skepticism from members of Congress, these efforts are unlikely to affect regulatory approvals in the current administration. It is possible, however, that the favorable regulatory environment for large bank mergers could end after the 2020 election, which could motivate other regionals to consider similar deals while the iron is hot.
  • Additional Deals Likely. The transaction may portend additional consolidation in the year ahead. As always, a changing competitive landscape will present both challenges and opportunities for the smaller community and regional banks in the market. Be ready!

Considering Conversational AI? Make Sure Your Solution Has These 3 Things


AI-10-9-18.pngThe pace at which consumers adopt new technologies has never been faster. Whether it’s buying coffee, booking travel, or getting a ride, or a date, consumers expect immediacy, personalization, and satisfaction. Banking is no different. According to a study by Oracle, when banks fall short of their consumers’ digital expectations, a third of consumers are open to trying a non-bank provider to get what they want – and what they want, increasingly, is a digital experience that’s smart, intuitive, and easy to use.

Conversational AI—a platform that powers a virtual assistant across your mobile app, website, and messaging platforms—is core to providing the experience consumers want. Whether you choose to build or buy a conversational AI solution, it needs three key things.

Pre-packaged Banking Knowledge
A platform with deep domain expertise in banking is what gives you a head start and accelerates time to market. A solution fluent in banking and concepts such as accounts, transactions, payments, transfers, offers, FAQs, and more, is one that saves you time training it about the basics of banking. Deep domain expertise is also necessary for a virtual assistant or “bot” to hold an intelligent conversation.

Your conversational AI solution should already be deeply familiar with concepts and actions common in banking, including:

  • Information about accounts – so customers can check balances and credit card details such as available credit, minimum payment and credit limit.
  • Information about transactions – so customers can request transactions by specific accounts or account types, amount, amount range (or above, or under), check number, date or date range, category, location or vendor.
  • Information about payments – so customers can move money and make payments using their bank accounts or a payment service such as Zelle or Venmo.

Human-like Conversations
Most conversational AI systems answer a question, but then leave it up to the customer as to what they should do next. Few conversational AI systems go beyond answering basic questions and helping customers accomplish one simple goal at a time, and that’s sure to disappoint some customers.

A conversational AI platform should be able to track goals and intents so bots and virtual assistants can do more for consumers. It should go beyond basic Natural Language Understanding and combine deep-domain expertise with the ability to reason and interpret context. This is what gives it the ability to help customers achieve multiple goals in a fluid conversation – creating a “human-like” conversation that not only understands what the customer is texting or saying but tracks what the customer is trying to do, even when the conversation jumps between multiple topics.

Platform Tools
Under the hood of every Conversational AI platform are the deep-learning tools. Effective analysis of data is at the core of every good conversational AI platform—understand how it collects and federates, builds, trains, customizes and integrates data. This will have a huge impact on the accuracy and performance of the virtual assistant or bot.

After you deploy the system, you want to be empowered to take full control of the future of your conversational AI platform and not be trapped in a professional services cycle. Make sure you have a full suite of tools that allow you to customize, maintain and grow the conversational experiences across your channels. You’ll need to measure engagement and continually train the virtual assistant to respond to ever-changing business goals, so you’ll want an easy way to manage content and add new features and services, channels, and markets.

Above all – is it Proven in Production?
There is a huge difference between a proof of concept or internal pilot with a few hundred employees to a full deployment with a virtual assistant or bot engaging with customers at scale in multiple channels. A conversational AI platform is not truly tested until it’s crossed this chasm, and from there can improve and grow with additional use cases, products and services and new markets.

During the evaluation, ask for customer engagement metrics, AI training stats, and business KPIs based on production deployments. Delve into timelines related to integration – are the APIs integrating with your backend systems fully tested in production? Understand how the system is trained to extend and do more. What did it take to roll out new features with a system already deployed?

If the platform has been deployed in production several times with several different financial institutions, you know it has been optimized and tested for performance, scalability, security and compliance. You can have confidence the solution was designed to work with your back-end and front-end ecosystem, channels and infrastructure. Only then has it been truly validated and proven to integrate and adhere to many leading banks’ rigorous and challenging regulatory, IT and architecture standards and technologies.

There’s just no way to underscore the value of production deployments as a way to separate the enterprise-ready from the merely POC-tested solutions.

Redefining the Meaning of a Customer Relationship


relationship-3-12-18.pngFor most people, brick and mortar branches have become remnants of prior generations of banking. In the digital age of mobile deposits and non-financial, non-regulated companies like PayPal there is little incentive to walk into a local branch—particularly for millennials. This presents an anomaly in the community banking model. Community banks are built upon relationships, so how can the banks survive in an era so acutely inclined towards, and defined by, technology seemingly designed to eliminate “traditional” relationships?

The solution is to redefine the term “traditional” relationship. While customers may not want to walk into a branch to deposit a check, they still want information and advice. Just because a millennial does not want to deposit a check in person does not mean that he or she will not need to sit with a representative for guidance when applying for their first home loan. Using customer segmentation and understanding where there are opportunities to build relationships provides an opportunity to overcome the imminent threat of technology.

If information and advice are the keys to building relationships, it becomes imperative that bank employees are fully trained and knowledgeable. It is crucial that community banks spend time hiring the right people for the right position and then train and promote from within. Employees must fully understand, represent and communicate a brand. That brand must be clearly defined by executive management and communicated down the chain of command. It is incumbent upon the leaders of the organization to first set an example and then ask their employees to follow suit. Some of the most successful community bank CEOs can recognize their customers by name when they walk into a branch. These are not the biggest clients of the bank, but they are probably the most loyal because of the quality of the relationship.

The focus needs to switch from products and transactions towards specific relationships with specific customer segments. Customer-centric banking strategies will improve the chances of survival for community banks. Those that are not able to adapt will be eclipsed by the recent revival of de novos or will be acquired by institutions that are embracing this customer-centric approach. A customer-centric approach is critical to drive value whether pursuing organic growth or M&A. For banks evaluating an acquisition, there are additional considerations that need to be addressed prior to entering into a transaction, in order to safeguard the customer relationships that the bank has built and ensure that the deal enhances the bank’s brand and business model, while also building value.

If you are one of the survivors and are engaged in an acquisition, what does all of this mean for you?

  1. FinPro Capital Advisors Inc. advocates having strict M&A principals and parameters when evaluating the metrics of a deal, which will vary from bank to bank. This concept extends to culture and branding as well. A good deal on paper does not necessarily translate to a successful resultant entity. If a transaction will dilute your franchise, disrupt your culture or business model, or in any way undermine the brand and customer base you have built, do not pursue it.
  2. Signing a definitive agreement is not the same thing as closing a transaction. Integration begins as soon as the ink dries on the contract. Planning should have occurred well in advance. Management needs to focus on employee, customer and investor reception of the deal, along with regulatory approvals and strategic planning. A poorly executed integration can provide an inauspicious start culturally and can increase merger costs substantially.
  3. Retain the best talent from each institution and take the time to ensure that the employees are in the right position. Roles are not set in stone and an acquisition provides the perfect opportunity to re-position the bank’s staffing structure. This includes implementing management succession and talent management plans for the new entity. Develop an organizational structure for the future, not just for today.
  4. Communicate effectively throughout the entire process. Be transparent and be honest. Bolster relationships and foster enthusiasm in the new entity from day one. Corporate culture is one of the most difficult attributes to quantify but it is palpable and can either energize every person in the company or rapidly become toxic and disruptive.

For all banks, the brand and culture that you build will directly impact your customer base and define the banking relationships you create. To build meaningful relationships with your customers, banks must first build meaningful relationships within the organization. In so doing, banks will be able to redefine their model by focusing on relationships instead of transactions, customers instead of products, and eliminate isolated divisions to create integrated organizations. The traditional banking model may be dead but banks with strong leadership and corporate culture will recognize the new paradigm and enact change to evolve accordingly.

IoT: Is Your Bank Ready?


internet-of-things-11-1-17.pngWhat if your fridge could sense the absence of a milk container and automatically reorder the milk for delivery? What if your car could sense the deflation of a tire, alert the driver and order roadside assistance service? IoT, or the internet of things, is a sensor-based technology that connects objects with sensors embedded in them for data transmission and monitoring over the internet.

IoT is making a lot of this possible. Bank boards should get ready for a future where many more devices are connected through the internet, which will increase exponentially the amount of transactions going through banks. Many of the security questions raised by the IoT-connected world have not been answered yet.

These sensors send and receive signals and carry interactions to and from other IoT devices or systems enabled with IoT technology. So, important implications of this technology are very large and continuous volumes of data flowing from IoT devices and impacting banking systems.

Some examples of impacts to banking systems include:

  • Banks will be improving features and capabilities to support more sophisticated consumer-based transaction processing, including IoT-based transactions.
  • With new banking technology integration and infrastructure investment, consumers will have increased access to detailed information regarding our most important IoT-based transactions and more options to manage finances surrounding these transactions.
  • Consumers will see new transaction reporting for IoT in our banking consoles.

Also, since IoT is an integrated form of data and information transmission, many new types of devices beyond common types such as cell phones, tablets and other kinds of mobile devices have the potential to tap into banking infrastructure.

Newer devices like refrigerator consoles or onboard computer systems in vehicles have the capability to transmit transactions for purchases that impact today’s banking architecture.

By one estimate, the market for IoT platforms, software, applications and services will grow from $170.57 billion in 2017 to $561.04 billion by 2022, a compound annual growth rate of 26.9 percent.

So, because of this, customers will need additional services on the banking side of IoT transaction processing to understand what types of transactions (and from which devices) are included in their bank accounts. Many of today’s customers are used to real-time bank account information and portal login for easy viewing of transactions. So, it is very likely that this new IoT capability for banking would be expected to come in at the same level for all forms of consumer banking.

Understanding how banking computer systems and infrastructure will be adjusted and upgraded to accommodate the influx of IoT-enabled transactions will play a crucial role in supporting customers and clients globally. Consumers will be most impacted by changes in retail and consumer markets. However, business use of IoT for financial transaction flows is also a growing factor. So, the combined business and consumer IoT sensor-driven transaction flows is an exciting area of banking and computing convergence that holds great potential for new and emerging global markets.

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.

5-4-15-HovdeChart1.png

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.

5-4-15-HovdeChart2.png

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.

5-4-15-HovdeChart3.png5-4-15-HovdeChart4.png

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.

Conclusion
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…

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. 

A Few Notable Deals You May Have Missed in 2014


12-12-14-Al.jpgTo successfully negotiate a merger transaction, buyers and sellers normally must bridge the gap between a number of financial, legal, accounting and social challenges. Couple this with significant barriers these days to acquiring another bank—such as gaining regulatory approval— and it’s no wonder that bigger financial deals remained scarce this year. For as much digital ink as was spilled on BB&T Corp.’s $2.5-billion acquisition of Susquehanna Bancshares a few weeks ago, here are three news items that may not have garnered national attention as they should have.

Ford Financial plans to buy up to a 65 percent stake in Mechanics Bank
The $3-billion asset bank will now be used as a platform for other bank acquisitions.
In October, Mechanics Bank of Walnut Creek, California, announced it planned to sell a controlling interest to the Ford Financial Fund, positioning the 109-year-old bank as a platform for other bank acquisitions. The private equity firm Ford Financial, which focuses on financial services, is led by co-managing members Gerald Ford (no relation to the late U.S. president) and Carl Webb. According to a piece in the San Francisco Business Times, Webb acknowledged Ford’s ambitions to use Mechanics Bank as the platform for additional acquisitions: “We’ve always been acquisitive. It’s served us well. As long as you’re growing and creating exponential value, why stop?” So if you’re on the West Coast, I’d keep an eye on Mechanics Bank expansion efforts in 2015.

Sterling Bancorp agrees to buy Hudson Valley
The deal forms a company with slightly more than $10 billion in assets.
Sterling Bancorp. in Montebello, New York, announced a deal in November to buy Hudson Valley Holding Co. in Yonkers, New York. One of the drivers for the deal, according to Jack Kopnisky, president and CEO of Sterling Bancorp. is blending Sterling’s commercial lending expertise with Hudson Valley’s attractive deposit base. As he shared, “the resulting institution will have strong asset generation capabilities, a cost effective funding mix, and a broad footprint in the dynamic marketplace centered on New York City and its surrounding region.” With the deal, Sterling will also cross the $10-billion asset threshold, one most banks seek to avoid. Indeed, banks lose significant interchange income when they hit the mark while adding additional regulatory oversight from the Consumer Financial Protection Bureau. Rather than be deterred by the increased regulatory exposure, it appears the potential value in the combined entity serving small- to middle-market commercial and consumer clients in the New York metro area outweighs the costs. The deal adds 28 branches to Sterling’s 32 and creates the 10th largest bank by deposit market share in the New York area. The deal is expected to generate $34 million in annual cost savings, and be accretive to earnings in the calendar year 2015. Rather than be paralyzed by the $10 billion number, Sterling’s board showed a healthy appetite to grow in both size and potential efficiencies.

United Bankshares completes acquisition of Virginia Commerce Bancorp
United, now with $12.1 billion in assets, has a strong track record of acquiring other banks.
With 46 offices in the greater Washington D.C. market and combined headquarters in D.C. and Charleston, West Virginia, this is one of the stronger regional bank players in the MidAtlantic. Being that D.C.’s economic fortunes have fared considerably better than most, I’d suggest keeping an eye on the acquisitions being done by this financial institution. United has a strong track record of acquiring and successfully integrating other banks into its business and given that its last deal, with Virginia Commerce, closed on January 31, 2014, I wouldn’t be surprised if another deal comes about in the next six to nine months, especially as they compete locally with at least four other strong, growing community banks: Cardinal Financial, Eagle Bancorp, Sandy Spring Bancorp and the Bank of Georgetown.

Certainly, banking acquisitions like these three show a commitment to profitability and efficiency—and reflect solid asset quality and sound capital positions. There is more than one way to grow your bank. These banks are proving it.