What's Driving the Recent Flurry of Regional Bank M&A?

Big-bank M&A deals are at their highest levels since the late 90's. In this episode of the Purposeful Banker, we explore the factors that are pushing more and more and regional banks to join forces. 


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Questions? Comments? Email Jim Young at jim.young@q2.com


Jim Young: Hi and welcome to the Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of content at PrecisionLender. Joined again today by Dallas Wells, our EVP of strategy. Today, we're going to go back to a tried and trued podcast topic. No, it's not live or actually thankfully. It's actually banking M&A. And I'll admit that sometimes this can feel a little bit like a fallback, like Dallas and I have a conversation. We bounce back a few topics, nothing really catches so we say, ah, I guess we'll just do an M&A podcast. And quite frankly, that's understandable because as bankers, M&A has just, has been a constant in the banking sector for years now. If it's not front and center at your bank, it's at least lurking just off stage. That said, there really is a development that makes it a compelling time to talk about M&A on this podcast.

And that's a recent S&P market intelligence article titled, "Wave of Large-scale U.S. Bank M&A Reaches Highest Level in 23 years." And before we start, I should note that they're measuring large scale deals of at least 500 million. And there've been 18 of them this year to this point. And that's the most since 1998. So with all that preamble, Dallas, we're going to explore the reasons for this and what it might mean for the sector moving forward and welcome aboard on the podcast as always.

Dallas Wells: Yeah. Thanks, Jim.

Jim Young: So first, when you saw this article headline, did it catch you off guard? Did you go, wow, I didn't realize it was that much. Or did you nod your head and say, yeah, that feels about right.

Dallas Wells: Well, I certainly didn't sneak up on me just selfishly, because quite a few of these have centered around our clients, Q2 PrecisionLender clients. So we've been hyper aware of these and all the implications it has on us serving them and managing those accounts. So it didn't sneak up on us. What was a little surprising is anything that's happening in banking that's the most since 1998. So I think we can all kind of remember those days of M&A activity. And really we weren't that far removed in the 90s from the changes to the interstate banking laws, which really kicked off this massive wave of consolidation in the industry. It been kind of a steady consolidation until that point. But once those laws changed and I believe that was the early 90s.

Jim Young: Yeah.

Dallas Wells: That's when Bank of America became Bank of America and Wells Fargo became Wells Fargo. They started rolling up all these banks. So when we're getting back to numbers from back in those days, that was a little surprising. So we knew there was a bunch, just didn't dawn on us quite how many of those there really were.

Jim Young: Yeah. I can remember, dating myself, I can remember the days of North Carolina National Bank and how I felt like every time I turned a corner, the name of the bank was changing in my own town and eventually became Bank of America. So looking at the recent sort of four deal flurry that's occurred over the past two weeks, I think that's sort of the impetus for this article. One of which I'd say is sort of on the super regional level, which is US Bank buying the U.S. section of MUFG. The others is I'd classify and again, maybe this is just my classification, ass more regional with Valley-Leumi - And I apologize if I mispronounced that one, Home BancShares/Centennial Bank and Happy State Bank, and First Interstate and Great Western. Is this just a function of, there's only so many of the, there's the big four and that sort of thing and there's only so many of the super regionals. Or is there something to, Hey, we're going to see a lot of stuff in say the 10 to 50 billion and does that mean anything?

Dallas Wells: Well, you're right. There's only so many of those. And if you look down that list of those banks kind of below that money center bank, so below the big four who aren't of course really allowed to do their own M&A activity for a good long while. But below that there's a whole bunch of those banks that have been involved in recent sizeable deals. So of course the big one from two years ago, being the creation of Truist and from BB&T and SunTrust, but M&T, PNC, now US bank, those are good large banks that are either still in the process of digesting a merger or who have recently signed something. And so I think there's more of those to come, but you're right. There's only so many. But a ton of consolidation in that 10 to 50 billion space. And a lot of what we've talked about on this podcast has been the issues around community banks and why so many of those have been swallowed up.

That's why I think when you talk about M&A trends, kind of the story can be hidden in the numbers a little bit. So there's been a lot of transactions over the last few years, but not as many big ones until just recently. So the count was high, but the dollar volume was reasonably low and what's shifted over the last year, two years is fewer counts of deals. So fewer of those community bank deals happening, but the deals that are happening have just trended way picker. So I'm sure that's kind of what we'll get into here, is what's different about those regional banks and some of the issues causing that. But as far as the distinction between the regionals and the super regionals, they're all pretty active. There's just only so many at that size. That's pretty rarefied air up in those asset sizes.

Jim Young: Yeah. Yeah. So going into what you were just touching on, it's almost like you see my questions ahead of time.

Dallas Wells: Almost. Yeah.

Jim Young: Almost. Because we've talked about this in previous podcasts that sometimes regional bank can seem like a little bit of a dangerous no man's land, not local enough or frankly, small enough to survive on deal scales and that sort of stuff that feeds community banks, but not big enough to compete with the resources and tech of the really, really big banks. Is that sort of thing what might be driving all this regional M&A activity?

Dallas Wells: If you listened to the earnings calls, they don't say it exactly that way, but I think so. So you can't just rely on true ownership of a local market and being a true blue community bank. Now, most of these regional banks market themselves that way, and they try to structure themselves that way, where they have a local regional presence, but within reason, right? So they've consolidated a whole bunch of operations, at least in, so not all deals maybe are approved centrally, but there'll be regional hubs for that to happen. So they're not really local, but they're also, they don't have the thousands of engineers and the multi-billion dollar tech budgets that JP Morgan and Bank of America have and are sort of squashing the rest of the industry with. So they are in this weird in between thing where they kind of have to compete with those banks because they're not local community banks, but so much of that is now moved to the technology world that it takes a ton of scale to make that happen.

And that is mentioned in just about every one of these announcements, that this is to drive technology scale, to be able to combine tech budgets. Sometimes they're actually buying a bank because of a specific platform that they have. That's why Boston Private got swallowed up by Silicon Valley Bank. They liked not only the relationships that they had, but also the platforms they'd built. So they're like, we want the people, we want the technology. Those are the two things that we're after. So that's become this new variable as a part of the M&A market, is where is that acquisition target in terms of technology and what can they offer and what they already have and how can we just sort of expand the budgets there and really lean into this to be able to keep up at least within shouting range of the very biggest banks.

Jim Young: Yeah. I thought it was interesting you mentioned the platforms and I guess I might also say like, at least, like in the case of Valley and Leumi, again, I apologize to all the good people at Leumi, if I'm blistering that pronunciation on that one so. But the talk on that one was about sort of like sectors, Valley, big CRE and Leumi is a Israeli bank with really strong roots in the tech sector there. And there was a lot of talk of like, Hey, we want to be able, this kind of gets us a path into sort of Silicon Valley here and tech lending and that sort of area. So maybe you're not competing across the board in every sector with the big boys, but maybe you get yourself a good niche in a couple of them, and that can be a way to do this.

Dallas Wells: Absolutely. Yep.

Jim Young: Well, you mentioned, I'm going to skip order on this a little bit. Because you talked about the local thing and I am a little bit curious about that when it comes to this sort of thing. And came across a little bit of a humorous article that I shared with you. And it was about, honestly we're not kicking Huntington Bank here. Any bank could've made this mistake. It's marketing faux pa though, when they bought TCF Bank, Minnesota based TCF Bank, they ran a billboard, Huntington Bank billboard that said, hello, Minneapolis. And they ran it in St. Paul and,

Dallas Wells: Whoops.

Jim Young: Yeah. As someone who lives in the Durham, part of the Raleigh Durham market and who's seethes when people just sort of refer to that as one metropolitan area, I could just imagine how people in Minnesota felt about that. I told you, I said, I'm withdrawing my money right then if somebody does that. But that said, my first checking account was with Wachovia because it was the nearest branch to my first newspaper job down in North Carolina. And in, after the financial crisis, when Wells Fargo swooped in other than like my checks look different and I don't felt like my life really changed. And I guess, so I'm kind of wondering as we talk about this sort of stuff when it comes to these regional consolidations and you're talking about these hubs and the efforts to try to appear local, does it really matter, or maybe from a political standpoint, but I guess like from a customer standpoint, is there a downside here?

Dallas Wells: Well, a couple things there. First of all, I think that mistake is exactly apart of what we're talking about, where these regional banks are trying their darnedest to be local. And so they're saying, Hey, here we come into the new market. We're going to be your friendly local bank. Only our centralized marketing team forgot to consult with the local folks on, Hey, does this all square with you? Right. Because they would've immediately said, you can't do that. And so they would've been better off obviously having no billboard than doing that. Now the second part is, does it really matter? All the trends, all the stats say that like for consumer business, not really. People are still making banking decisions based on convenience and proximity. Sometimes that's still a branch, sometimes convenience is the tech platforms and the online banking access.

So as long as your tools are solid there, you're probably going to be okay. So does it matter in the consumer world? It doesn't seem to matter a whole lot. Now the commercial world can still be very different. So what that billboard says to a commercial borrower is, I can see decisions are not being made locally. So it feels like if I was a customer of TCF or if I'm just a local potential customer in that market, yeah, maybe this isn't for me because you're going to send my stuff off to somewhere clearly far away from Minneapolis St. Paul, and you're not going to understand the local market, local competition, my issues. Am I really going to have access to a local decision maker? It kind of feels like maybe not. So that can absolutely matter in the commercial world and things like you said, politically, government lending, those things matter there.

And so I think that's the very fine line that these regional banks are having to try to walk, is we want to be a local player. We want to be perceived as a local player, but also we're going for scale here. We are going to centralize a whole bunch of stuff otherwise these deals don't make sense. So it's a fine line and some are pulling it off better than others. And it's tricky and I think you're going to see a whole bunch of issues like this. There's always bugs, and conversion issues, and tricky stuff in these, especially the bigger the deal, the more moving parts there are.

And I mentioned earlier, we're involved in a handful of these now, so we kind of get a front seat view or a seat at the table anyway, to watch how processes come together, how technology platforms are squished together, how teams are combined. It can look pretty good on paper as you put the deal together. And then when you actually get to the execution of it, it's always messy. It's always painful. There's always mistakes. That's not the last headline like that, that you're going to see.

Jim Young: Yeah. And it is, again, like we talked about, this is a trickier thing. Like if you're, again, you're one of the big four, you don't really have to bother with trying to appear, you know what I mean? You are what you are and people know what you are when you come into a market.

Dallas Wells: Yeah. People don't come to Bank of America because you're local. And you know that it's St. Paul and not Minneapolis. They don't care. They chose Bank of America for a different reason.

Jim Young: Right.

Dallas Wells: And so I think that's the strategic question that Huntington and others have to ask is, are we going for this big well-recognized in some cases, now national name where like, does US Bank need to feel local with a union bank stuff? Or are they US Bank now? They're bank of American. If they can lean into the, lean into that scale. Right. You get access to all these things because you're banking with a really big bank. Maybe you own that instead of the local stuff that you want so badly, but maybe you just have to choose a different path. Like you can't have both.

Jim Young: Right. So you touched on just a little bit of it, and of course again, what else is the bank CEO going to say, why are these M&A's are all the right moves. But I also, just reading this sort of stuff, you get sort of the sense from the people covering it and sort of commenting on it. They're like, oh yeah, this is the move. This is the right move. And here's why it's the right move.

Dallas Wells: Yeah.

Jim Young: I guess what I'm wondering is, is you talked about some of those downsides, so is it really the right moves? Or maybe it's a case more of, is it the only move? And that's maybe what we're talking about here.

Dallas Wells: I think what you see as you look at banks that perform really well, a lot of them are inquisitive. And so you wonder if it's a chicken or the egg thing, and is it that culture around growth and innovation and being essentially progressive, is that what drives some of the performance or is it just the fact that they bought stuff? And that, that is accretive. I've been a part of banks that have shunned M&A, and I've been a part of banks that were eyeball deep in it. It does shake things up. And I think one of the dangers that the industry faces is complacency. We talk a lot on this podcast about the dangers lurking around the corner, because we think that's important and worth talking about. But also the wonderful thing about a bank is like revenue accrues while you sleep right?

At its core, it's not a complicated business. And so there's a lot of bankers out there saying, we've got good relationships in the markets that matter to us and we're not setting the world on fire, but we're doing just fine, right? Profits are rolling in. And there's a lot of community banks that are for all the pressures we talk about, they're the most profitable business in their local town. Nothing wrong with that. Right. So that complacency though I think, is part of what concerns us, is that the banks down the street now are not just down the street. They can be anywhere in the world and they can come disrupt that very quickly. And so sometimes these things are good for shaking things up. It's not such a bad thing to combine your commercial lending teams and to kind of have a bake-off so to speak, to see who gets to run the group, to push your people a little bit, to be able to put the best of the two teams in with a new mandate and let them run with things.

I think you get new ideas, you get new strategies, you get some ambition that at times can be good to shake things up. So beyond just the math of, the math does work for these deals right now. On top of that, I think culturally, again, it will be painful. You will lose some good people. You'll lose some customers over it, but I think there's a lot of good that comes out of it too. And so that's why you see banks are, there's rarely somebody who's in between. Eh, we might look at a deal. We might not. They're either shopping for deals and they are an acquirer or their study issue goes, and we want no part of it. So you are picking a path there and it's because you're deciding which side of that you want to be on.

Jim Young: Yeah. And I guess the final area that's showing this is going to be spoiler here a little bit, a little bit self-serving but thinking about the downside part of it, and honestly thinking about what we talked about with PPP and how some banks that had digital issues, lost customers at that point. And I guess to me, I could see a downside of, you said mergers are messy. No doubt. And tech part of the mergers may be the messiest part. I mean the culture part and like we said, the marketing and all that, but imagine if you were a bank kind of going through that messy part, you don't really have your systems quite right, then PPP hits you and how rough that might have been. And I guess, you said you lose some customers. I could see this, if you don't sort of think through this ahead of time, before you sign everything of how it's going to work, I could see it having a major impact if it makes you take a step backward technology-wise.

Dallas Wells: Sure. But I think the logic is, as you combine two banks, you say, all right, we have two core systems. We have two loan origination systems. We maybe have two CRMs and the banks that do this really well, don't just say, all right, we're the buyer. You go on all our systems, we'll set up the onboarding tickets and on you come. They actually will look at those side by side and say, well, which one's better? And so they just like with the people, they get to choose between those two. We've seen that happen a number of times where the bank being acquired, their systems will survive because they're either better systems or they're better implemented with less messiness to them. And so as something like PPP happens, it's almost like you have some redundancy. You've got two teams who have been there, done that.

You've got probably two sets of platforms. You've got a couple of cracks at it. Like, well, this system won't work, but that one will, that we just acquired or that people recently used. There's like some institutional familiarity with those things. So yes, it certainly adds complexity and chaos, but that was the reality for everyone with PPP. And if you've got a team that's used to that chaos, used to integrating things, used to building on the fly, used to having to work with new strange teams, because they've been in the middle of acquisitions recently, they have those muscles built. Right. And they have mechanisms for dealing with that sort of chaos. So those banks tended to do pretty well.

Jim Young: Yeah. And that's a fair point. That's a good point that thanks to M&A, the odds that you haven't ever gone through this before are pretty slim right now if you're in the banking industry.

Dallas Wells: Yeah. And it's like, things were already crazy. So like, let's just add another layer on top and everybody's already running around with their hair on fire. It'll be fine.

Jim Young: Yeah. All right. Well, thanks for indulging us on another M&A podcast. And trust me, I'm just going to go ahead and put it out there that we'll be doing another M&A podcast at some point in the future, because it's, like I said, it's an ongoing, it's just a fact of life now in the banking industry. And Dallas, thanks for coming on.

Dallas Wells: Yeah. Thanks Jim.

Jim Young: And that'll do it for this week show. Thanks so much for listening and now for a few friendly reminders, if you want to listen to more podcasts, check out more of our content, you can visit the resource page at precisionlender.com or head over to our homepage to learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the feed in Apple podcasts, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Jimmy Young with Dallas Wells and you've been listening to Purposeful Banker.


About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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