Serial bank buyers' refrain: The fundamental things apply
Bank M&A has been a case of fits and starts this year.
Merger activity was very slow at the beginning of the year as buyers and sellers adjusted to a late 2018 swoon in bank stocks. It appeared things were heating up over the summer, with 18 deals announced over two weeks in July, before more stock volatility caused banks to again take a breather.
Yet the reasons for consolidation — a challenging rate environment, compliance burdens and heightened competition among banks and nonbanks — persist, according to participants in a panel discussion at an annual banking symposium hosted by the University of Mississippi. There are a number of banks still out there looking for deals, they said.
The panelists were Dan Rollins, chairman and CEO of BancorpSouth in Tupelo, Miss.; Hoppy Cole, president and CEO of First Bancshares in Hattiesburg, Miss., and Chris Mihok, a director and investment banker at Keefe, Bruyette & Woods.
The $20 billion-asset BancorpSouth and the $3.5 billion-asset First have announced eight deals in the last 18 months, paying $667 million for more than $3.5 billion in assets.
The following is an edited transcript of their comments on M&A, geographic expansion and the value of deposits. A second, upcoming article will look at pricing methods, retention of talent and the growing trend of credit unions buying banks.
What’s your view on balancing acquisitions and organic growth?
DAN ROLLINS: When you look at our financial objectives, we can get there on our own organically, but M&A can fast-forward us to those goals. You have to do both. You can’t do one or the other.
HOPPY COLE: We started our strategy in 2009 of building a regional company. Its been a combination of both organic and acquisitive growth. We’ve done over the last ten years about 26% compound annual asset growth. About two-thirds of that has been acquisitive.
Organic growth has really been the focus for us. The opportunities come when they come. We never budget those.
What’s your view on the M&A environment?
CHRIS MIHOK: The ability to grow revenue and earnings, at the end of the day, is challenging, with the yield curve where it is, banks’ loan-to-deposit ratios. It is difficult to grow revenue. So one of the easier ways to produce earnings now is to reduce costs. Technology is helping with that, but one of the larger ways to cut costs is through transactions.
If we have one, two more rates cuts over the next few months, and if we do have bank earnings coming down in the foreseeable future, excluding credit costs, then we expect more M&A to occur in the future.
For a bank like Dan’s, with $20 billion in assets, buying a $100 million institution doesn’t make much sense. They can get more financial lift using the access dry powder for a share repurchase plan virtually risk free. No chance of run-off or Hoppy stealing his customers.
This means you have to expect more meaningful deals. As for the number of deals, you have to expect that number to come down. That means there’s a limited amount of buyers.
How are buyers and sellers adjusting to the decline in bank stocks?
MIHOK: From a management perspective, it is less of an issue. But the board remembers when the stock was at its 52-week high, and to sell for a price below that is challenging.
COLE: I agree. The seller tends to remember years past. But some of the headwinds that have been there still remain. There are a number of private institutions in our markets that have aging managements and have an illiquid stock. And then margin compression and a lack of scale have really affected them. On the smaller end, I still see a lot of activity irrespective of the pricing mechanisms.
ROLLINS: I think it is all catalyst driving. Price expectations are real, but it takes some kind of catalyst to sell, regardless of size, whether it’s the age factor, turmoil in the boardroom or in management. I was sitting across the room from a [older banker] the other day who owns about 80% of this bank who said, ‘You can look at me at tell that my shelf life is limited. I’ve got to do something.’
How do you value a target’s deposits?
ROLLINS: I’ve been involved in 40-plus transactions in my career, and deposits are always where the value is. You never pay a premium for assets. … When you see somebody whose costs of funds is 50, 60, 70 basis points higher than everyone else’s — there's no value in that today.
COLE: We’re still a young bank — 23 years old — and there are a lot more banks out there with legacy business. Through M&A activity we have totally changed the funding side of our balance sheet. It is very difficult to grow deposits organically, and we’ve been fortunate enough to acquire some older, 100-year-plus institutions that have made the funding side of our balance sheet look much older and more stable. It’s our inventory.
MIHOK: The funding side of the is the backbone of the bank. Think about how that trickles down into everything else. It impacts the net interest margin and the profitability of the bank. You’re look at a bank with 2% cost of deposits today — it is challenging for them to get a 3-4% net interest margin unless they’re lending out at 7-8%. Now if they’re lending at those types of levels, what kind of credit are they putting on their books?
Buyers also need to look at whether the deposit side of the balance connects to the asset side of the balance sheet. Are they customers that interact with the bank, or are they purely at the bank for one reason, whether that’s hot money or certain covenants on the loan side that explain why they’re not banking there? A bank with relationships on both sides of the balance sheet is much more valuable.
Let’s talk about geography. What is your long-term vision for your banks’ footprints?
COLE: We’ve been fairly disciplined about linking our geographies together. Our vision in 2009 was to build a more regionally focused community bank and put together, on a composite basis, a company that had shared economies and better demographics in terms of population growth and household income growth, but shared a similar culture. When you put two banks together, you need to share the same culture and you need to view the world the same.
We’ve grown sequentially. We began in Hattiesburg, and we drew a box to include Jackson down the Gulf Coast to Baton Rouge. We filled that in and kept going. First, we get management in place that understands the geography. There’s also a risk in there. As you enter new markets and expand in others, there is exposure there, too.
ROLLINS: I think culture is really important. We have to make sure we get along and that one plus one equals three. We’re also interest in growing in our footprint. If you draw a circle around our eight-state footprint, anywhere in there is fine with us. There’s a lot of opportunity on the west side for us. There may be some opportunity along the Georgia border but we haven’t gone there yet.
When you’re talking about how to drive value and control costs, market share makes a difference. There’s nothing that happens in Houston that our team doesn’t know about. Of course, I’m talking about Houston, Mississippi, where we have 55% market share. But the demographics and growth potential are very different than what we see in Houston, Texas, where we’re relatively unknown but there’s a big growth opportunity for us. You have to be able to marry both sides of that.