A month to remember in bank M&A
May was a pivotal month for bank consolidation.

For starters, lawmakers passed comprehensive regulatory reform that many industry experts believe could spur more bank combinations. One of the law’s key provisions will raise the threshold for systemically important financial institutions, which could get a number of large acquirers off of the sidelines. Other changes could encourage smaller banks to go for a deal that they once were hesitant to pursue.

The month also turned out to be a busy one for transactions. At least 20 deals were announced during May, accounting for about a quarter of the entire year’s activity.

Because it featured the year’s three biggest bank deals — Fifth Third Bancorp’s $4.6 billion purchase of MB Financial, Cadence Bancorp’s $1.3 billion acquisition of State Bank Financial and Independent Bank Group’s $1 billion agreement to buy Guaranty Bancorp — the month also accounted for 56% of 2018’s aggregate deal value.

There was a wide variety of sellers, ranging from a de novo to well-established regionals and from commercial banks to large mortgage lenders. Several banks are based in major metropolitan markets that have already seen significant amount of consolidation in recent years, increasing the perceived scarcity value of the independent banks that remain in those communities.

Here is a look at the most noteworthy deals that were announced in May.
Fifth Third-MB Financial
This deal is not only this year’s biggest bank deal, it is also the largest merger to be announced in about three years. Additionally, it marks the $142 billion-asset Fifth Third’s first post-crisis bank deal — its last acquisition was the 2008 purchase of First Charter in Charlotte, N.C.

This deal has more people wondering if other regional banks will take a hard look at acquisitions. Many may bide their time to see if investors eventually grow comfortable with this deal’s tangible book value dilution, long earnback period and aggressive cost-cutting targets. The deal priced MB Financial at 276% of its tangible book value.

“Fifth Third has a target on its back to execute,” said Chris Marinac, an analyst at FIG Parners. “They have to [perform] flawlessly to get investors back.”

A sense of urgency may have prompted Fifth Third to buy MB Financial, which is based in Chicago. A number of large banks in the Windy City — PrivateBancorp, FirstMerit and Taylor Capital — have been acquired in recent years. And Fifth Third had no interest in a nickel-and-dime strategy.

“A smaller, less-additive deal would be a distraction for a significant period of time,” said Greg Carmichael, Fifth Third’s chairman and CEO. “There are very few that create the scale in such an attractive market. This is important to us.”
Cadence-State Bank
State Bank’s sale to Cadence was the year’s biggest deal — for one week.

The $11 billion-asset Cadence, like Fifth Third, had been on the sidelines for several years, although Chairman and CEO Paul Murphy had made it clear that he wanted to pursue acquisitions. Rather than stick to Texas, Murphy made a beeline straight to Atlanta to snag the $5 billion-asset State Bank.

The sale represented a coup for Joe Evans, who recently stepped aside as State Bank’s CEO. Evans led a $300 million recapitalization of State Bank in 2009; the company went on to buy more than a dozen banks, through failures and whole-bank transactions.

Chicago, like Atlanta, is a large market getting looks from acquirers, including CenterState Bank in Winter Haven, Fla., and Renasant in Tupelo, Miss. That is making the remaining banks in the city much more valuable. State Bank sold for 250% of its tangible book value, representing one of the year’s priciest deals in terms of the premium.
Independent Bank-Guaranty
Rounding out the trio of big deals is Independent’s pending purchase of Guaranty.

Like the other large acquisitions, the seller is based in a major urban market — Denver — that has dynamic demographics and a dearth of large takeout targets. The $8.8 billion-asset Independent agreed to pay a price that is more than 300% of Guaranty’s tangible book value.

Independent, based in McKinney, Texas, did not plan to enter Colorado, much less make a major acquisition there. But it gained a small Colorado branch network after buying Carlile Bancshares last year. Management liked what it saw and decided that a large acquisition was needed to quickly build the necessary amount of scale.

The company, which had touted its Texas focus, had “had some explaining to do to the market on what we were doing going to Colorado,” David Brooks, Independent’s chairman and CEO, said about the Carlile deal. When the time came to pursue Guaranty, Brooks and his team were ready to prep investors for an out-of-state deal.

The Guaranty deal “was well telegraphed,” said Matt Olney, an analyst at Stephens. “The overall match with Guaranty makes sense.”
German American Bancorp-First Security
Mark Schroeder, CEO at the $3.1 billion-asset German American, was one of American Banker’s 2016 Community Bankers of the Year for managing a well-run bank that avoided splashy moves. The Jasper, Ind., company developed a reputation for avoiding big cities, getting into national business lines or negotiating blockbuster deals.

German American’s $105 million acquisition of First Security in Owensboro, Ky. continues that tradition. While the company will enter three Kentucky markets, Owensboro, Bowling Green and Lexington are nowhere close to the size of the cities highlighted in the year’s other big acquisitions. The premium, which priced First Security at 162% of its tangible book value, is more in line with other deals announced this year.

The transaction, which will be accretive to German American’s tangible book value, has been well received by those who follow the company.

“In our view, the acquisition is a fairly-priced, low risk deal,” Brian Martin, an analyst at FIG Partners, wrote in a note to clients.
Hanmi Financial-SWNB Bancorp
Hanmi Financial in Los Angeles went through a turbulent post-crisis period that included a short-lived effort sell itself in 2013 and an unsuccessful attempt to force a merger with BBCN Bancorp two years later.

The Korean-American company, like many other ethnic-focused banks, struggled to find a way to grow that didn’t involve becoming more mainstream. In recent years, however, the $5.3 billion-asset company has hit a stride as an acquirer, focusing on Asian-centric markets in growing cities.

The $77 million acquisition of SWNB, the parent of Southwestern National Bank will give Hanmi more access to Houston, another hotbed of bank merger activity. SWNB also has offices in Dallas and Austin; most of its customers are of Chinese, Vietnamese and Indian descent. The deal priced SWNB at 158% of its tangible book value.

“This transaction will bolster our footprint in attractive Texas banking markets,” said C.G. Kum, Hanmi’s president and CEO. “SWNB has a strong portfolio of assets with an excellent credit profile along with an attractive deposit base.”
Molly Gallaher Flater, chairman of Blue Gate Bank.
Big Poppy Holdings-Blue Gate Bank
Blue Gate Bank in Costa Mesa, Calif., which opened last year, has already agreed to cash out, deciding to sell itself to the parent company of Poppy Bank in Santa Rosa, Calif. It was one of the first de novos to end a lengthy drought, and it was the first new bank to open in California after the financial crisis.

The $130 million-asset Blue Gate decided to sell after it struggled to add enough core deposits to keep up with loan demand, according to the $1.6 billion-asset Big Poppy's merger application. Regulators refused to sign off on a funding strategy that would have strayed from the organizers' business plan.

Molly Gallaher Flater, Blue Gate's chairman, is also a Big Poppy shareholder. Poppy Bank, meanwhile, is eager to become a statewide bank.
Timberland Bancorp-South Sound Bank
Timberland’s planned acquisition of South Sound Bank marks a major play in Olympia, Wash.

The $187 million-asset South Sound has nearly 5% deposit market share in Olympia, where it is based, according to data from the Federal Deposit Insurance Corp. The financial metrics are nice: The $47 million deal should be accretive to the $1 billion-asset Timberland’s earnings and tangible book value.

The deal should connect nicely with Timberland's operations in nearby Seattle.

The merger “leverages our unique talents and abilities within the Puget Sound market area and strengthens our position in the marketplace,” Michael Sand, Timberland’s president and CEO, said in the release.
Bruce Van Saun, Chairman and CEO  of Citizens Financial Group.
Citizens Financial-Franklin American Mortgage
May ended with one more large acquisition, with Citizens in Providence, R.I., agreeing to buy a large mortgage originator in Franklin, Tenn.

Citizens will pay $511 million in cash for Franklin American, which has a $41 billion mortgage servicing portfolio. The deal — the sixth-biggest for a bank acquirer this year — will triple the size of Citizens’ off-balance sheet mortgage serving platform. It will more than double the size of company’s origination platform.

Citizens, which is led by Chairman and CEO Bruce Van Saun, said it will have one of the nation’s 15 biggest bank-owned mortgage platforms when the deal closes.