This is the final installment in 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:
John Asbury, president and CEO of Union Bankshares
Gary Bronstein, a partner at Kilpatrick Townsend & Stockton LLP
Eugene Ludwig, founder and CEO of Promontory Financial Group
Kirk Wycoff, managing partner of Patriot Financial Partners, L.P.
It is tempting to think that last year’s tax cuts will spur deal-making in the bank industry. The cuts have driven up profits and bolstered valuations, with bank stocks trading at their highest earnings multiples since before the financial crisis. But deal volume ebbed instead of flowed last year.
“The tax reform allows potential sellers to wait longer to see how things evolve,” says Sally Steele, chairwoman of Community Bank System, Inc., an $11-billion bank based in Dewitt, New York.
Steele made this point while attending Bank Director’s 2018 Acquire or Be Acquired conference in January at the Arizona Biltmore resort in Phoenix. Her perspective on the M&A landscape is one of five that Bank Director cultivated from attendees at the event.
Whether it is prudent for a bank to sit on the sidelines as things evolve, rather than take advantage of a high valuation, is a risk—particularly when it comes to regulation. “You might have a four-year window where we have a kinder, gentler regulatory environment,” Steele notes.
All of this speaks to the axiom that banks are sold, not bought. “Folks have to come to a decision that selling is a good strategy, whatever the motivation,” says Steele.
Value plays an obvious role in this decision, but it alone is not enough. Social issues involving leadership and culture also play a major role, Steele says.
For instance, succession is a perennial topic of conversation in the industry. As leaders retire, it can be hard to find successors that are qualified to step into the void. One way to address this is to sell the bank.
There are also times when the current leadership is not a good fit, irrespective of retirement. This came up in one of Community Bank System’s recent acquisitions, where the CEO was better suited to be a commercial lender than the CEO.
Steele speaks on these issues from experience, as she has served as a director of banks that have been both buyers and sellers.
Prior to serving on the board of Community Bank System, Steele was a director of Grange National Banc Corp., a Pennsylvania-based bank that grew to $278 million in assets before selling in 2003 to her current bank.
Since then, Community Bank System has acquired seven other banks, the biggest and most recent being Merchants Bancshares, a $1.9-billion bank based in Vermont, acquired last year.
The principal motivation for buyers tends to be growth. The bank industry has consolidated every year since 1984. Prior to that, the number of banks in the country tended to grow on an annual basis. Since then, it has dropped without interruption every year.
Given this, it is easy to understand why banks are so inclined to grow. There comes a point in a consolidating industry when the law of the jungle takes hold, forcing banks to choose between eating or being eaten.
This motivation helps explain the tendency for mergers and acquisitions to impair, as opposed to improve, shareholder value. It was the imperative to grow, after all, that led banks in the prelude to the financial crisis to acquire subprime mortgage originators, as Bank of America Corporation did with Countrywide Financial and Wachovia did with Golden West.
Regardless of the numbers, however, Steele emphasizes the central role that culture plays in the acquisition process. “From a buyer’s perspective, it’s about how the combination fits,” says Steele. “Fits in a lot of different ways, not only monetarily and economically, but also the culture is huge. Bringing in the wrong culture just doesn’t work. I don’t care what anybody says, it doesn’t work.”
As the chairwoman of an acquisitive bank, this is one reason Steele attends the annual Acquire or Be Acquired conference, coming four out of the last five years.
“I’ve been through the acquisition process, and it’s a scary thing,” says Steele. “There is a lot of distrust when folks start approaching you about that kind of thing. So having rapport and thinking, ‘Oh, I met that person at the conference.’ That’s helpful. So much of it is personal. I don’t care what anybody says.”