Can BOK Financial make one of the year's priciest M&A deals work?
BOK Financial in Tulsa, Okla., a powerhouse in producing noninterest income, will look to improve the fee-generating prowess of its latest acquisition.
The $33 billion-asset company agreed Monday to pay almost $1 billion for CoBiz Financial in Denver. The deal is among the year's priciest in terms of the premium to the $3.8 billion-asset seller's tangible book value.
BOK Financial made it clear that its financial projections are built around cost-cutting. But the transaction could be even more lucrative if the company, which derives about 40% of its revenue from fees, can incrementally move the needle upward at CoBiz, where only a fifth of revenue comes from noninterest income.
Boosting fee income at an acquired bank is easier said than done. Often it requires cultural change and buy-in from the seller's staff. Some businesses are difficult to export. Regulatory scrutiny is a concern when it comes to cross-selling, and customers' views on add-on products have changed in the wake of the Wells Fargo scandal.
Still, BOK FInancial's management expressed confidence in its ability to transform CoBiz, pointing to its track record with prior deals. After acquisitions in Arizona and Texas, the company was able to increase the ratio of fee income to revenue from less than 20% to 30%.
Executives highlighted past success pitching wealth management and treasury management services, along with mortgage products, to sellers' clients. BOK Financial also believes it can make bigger loans to CoBiz's commercial clients.
"I know the opportunity is there," Steven Nell, BOK Financial's chief financial officer, said Monday during a conference call to discuss the deal. "We only really looked at the cost synergies, but the opportunity is there. And we, quite frankly, are pretty excited about being able to roll out those fee services to CoBiz customers and to their relationship managers — who can sell it."
Nell's comments were in response to an analyst's question about BOK Financial's approach to building fee income at CoBiz. One analyst pointed to the vast gap in the ratios of noninterest income to revenue at the companies; another tried unsuccessfully to coax a fee-income target from BOK Financial's management.
The immediate challenge for BOK Financial will be winning over CoBiz's employees, since they will be asked to pitch more products and services to their customers and prospects.
"The biggest impediment in getting a strong start is the cultural differences and getting the abilities right," said L.T. Hall, CEO of Resurgent Performance. "When putting two banks together, employees are concerned about their jobs. Those two organizations can pull [the deal] off if they deal with the cultural and organizational issues quickly."
BOK Financial, for its part, has been able to encourage cooperation and communication among its various departments in a way that gives customers integrated experiences and quicker turnaround times on decisions, said Steven Bradshaw, its president and CEO.
It takes time to instill that type of approach, which is why BOK Financial isn't relying on those opportunities to hit its financial targets, Bradshaw said.
CoBiz could have a better chance at boosting fees when it becomes part of a bigger organization with more products. The company has some fee-generating platforms, including an investment advisory business and a treasury management shop, but lacks the breadth and scale that exists at BOK Financial.
Building scale "is tough to do," said Brady Gailey, an analyst at Keefe, Bruyette & Woods. "It is harder to start up and its harder to get to the point where it is a nice contributor to income.”
The other challenge for BOK Financial is the cyclicality of businesses such as brokerage and mortgages, which are key parts of the company's arsenal, said Gary Tenner, an analyst at D.A. Davidson. BOK Financial has historically been able to navigate economic cycles, he added.
CoBiz executives admitted during the conference call that they faced tough decisions on technology investment and product development, which should be addressed by selling to BOK Financial. The company was also dealing with some "holes in the management team," Chairman and CEO Steven Bangert said.
“We thought this would be a good time to at least look at a potential partner," Bangert said. "I'm just delighted that we ended up with BOK because ... I have just greatly admired this franchise for many years."
Succession seems like a contributor to CoBiz's decision to sell, said Timothy O’Brien, an analyst at Sandler O’Neill. Scott Page, who was CEO of CoBiz’s bank and was viewed as the successor for Bangert, retired late last year. (Bangert was 61 when CoBiz filed its proxy statement in March.)
“I think that put them a step closer to taking this route,” O’Brien said. “We're also far enough along in this cycle that a lot of banks are thinking that the credit performance won’t get any better than now. The question for board and management teams is do they want to work through and deal with the loss and uncertainty" of another downturn.
Financial metrics could have been a factor; BOK-CoBiz is the fourth-largest bank M&A deal announced this year. In each instance, the seller has been based in a fast-consolidating city where premiums are much higher than the industry average.
BOK Financial has competed against CoBiz for years, particularly for commercial clients. That familiarity made a deal easier to pursue.
“CoBiz has been on our list for a long time,” Bradshaw said. “We have a real appreciation for their credit profile and the way they operate the bank. They look like a small version of us.”