This is the first article of a five-part series that examines the bank M&A market from the perspective of five attendees at Bank Director’s Acquire or Be Acquired conference, which occurred in late January at the Arizona Biltmore resort in Phoenix.
Read the perspectives of other industry leaders:
Eugene Ludwig, founder and CEO of Promontory Financial Group
Kirk Wycoff, managing partner of Patriot Financial Partners L.P.
The number of mergers and acquisitions in the bank industry over the last two years had been on the decline. A total of 196 unassisted mergers were consummated in 2017 compared to 223 in 2016 and 264 in 2015, according to the Federal Deposit Insurance Corp. Yet, with the recent tax cut and regulatory changes this trend could soon reverse course, suggests John Asbury, president and CEO of Union Bankshares, a $13 billion asset bank based in Richmond, Virginia.
“I think [M&A activity] is picking up and I firmly believe that we're going to see more consolidation,” Asbury said at Bank Director’s Acquire or Be Acquired conference in Phoenix, Arizona, earlier this year.
Asbury, who became CEO at Union in October 2016, is executing a growth strategy that balances acquisitions and organic growth. The opportunity to gain insight into the M&A market is why Asbury and hundreds of other bank CEOs, senior executives and board members attend Acquire or Be Acquired every January in Phoenix. “The reason I come and the reason why we have others come is really just the opportunity to see what the contemporary issues are,” says Asbury. But “the networking is off the charts. I think that's important and not to be underestimated.”
The bank industry will never return to the salad days of consolidation in the mid-1990s, right after the barriers to branch and interstate banking came down. Yet, the conditions for further consolidation remain present, given the inherent advantages of scale in a highly commoditized industry with nearly 6,000 banks and savings institutions.
The U.S. Senate recently passed legislation that could provide modest regulatory relief to banks, and a more accommodative regulatory regime will fuel this in the short run, predicts Asbury. This is particularly true for potential acquirers that sit just below $10 billion assets, as Union Bankshares did until completing its purchase of Xenith Bancshares earlier this year.
“When you go over $10 billion in assets, several things happen,” says Asbury. “The most punishing aspect of it is the Durbin Amendment of the Dodd-Frank Act. The Durbin amendment caps our debit card interchange income, literally cutting it in half. For Union, that's about a $10 million dollar a year revenue loss.”
The other threshold to watch is the one at $50 billion in assets, says Asbury, over which banks are considered to be systemically important and must submit to an even more stringent regulatory regime. The Senate bill would raise this threshold to $250 billion. “If it's not as punishing for a bank to be over $50 billion dollars, I think you're going to see [banks near it] become quite active.”
Size also comes into play in a less direct way that could impact smaller banks’ approach to deal-making. For years, large banks focused on acquisitions as their principal growth strategy. But now that JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. are prohibited from making additional acquisitions, as they already exceed the 10 percent nationwide deposit cap, they have turned inward for expansion, focusing instead on organic growth.
This changes the calculus for smaller banks in two ways, says Asbury. In the first case, community banks will no longer benefit from the customer attrition that large banks experienced in the wake of mergers and acquisitions. Additionally, because big banks are turning inward and pegging their growth strategies to the quality of their products and services, especially when it comes to technology, the value proposition of community banks, which traditionally revolved around better service, will be less effective at fueling growth.
“It's no longer as easy to pick up customers that are being run out by the big banks because of M&A,” says Asbury. “That's why you're seeing consolidation going on in our industry among the smaller players. It's not just the regulatory regime; it's also the ability to be relevant. The greatest risk to this industry, banks of any size, but particularly the smaller ones, is the risk of irrelevance. You've got to have sufficient scale. You've got to have a competitive product offering.”
Asbury points to Union’s recent move to hire a head of digital strategy. “You're unlikely to find someone in that role at a much smaller institution because they probably don't have the resources to be able to afford the role or to be able to afford executing a strategy around digital.”
As a result, Asbury predicts that the industry will continue to see mergers of equals among banks in the $500 million to $1 billion range, creating $2 billion to $3 billion banks.
An added benefit to combining banks of that size is it creates a more attractive takeout target. “One of the questions that I was asked [as a panel member at this year’s Acquire or Be Acquired] is how small is too small. I said in general under $1 billion is hard for us to think about because there are bigger fish to fry. We don't want to be sidelined digesting a small opportunity when there's a more strategically important larger opportunity around.”
Union is clearly in an acquisition mode, and Asbury says that banks looking for a buyer need be realistic when it comes to price. “There's a lot of take-out premium on some of these smaller companies,” he says. “[It’s already] embedded in their stock. So I think it's not realistic for management of these smaller banks...to expect a further premium on top of that.”