The best advice that Mark Meservey can offer financial advisors going through a consolidation is this: Sit tight.
And Meservey should know. This senior vice president of investment management at Prosperity Bank in Houston, works for an institution that's in the middle of an acquisition. The $9.7 billion Prosperity announced in September that it plans to acquire the $72.5 million Bank of Texas in Austin through a stock swap.
Meservey has been on the other side of the equation too. He was at the $1 billion La Grange State Bank in the central Texas town of La Grange, which had steadily expanded through acquisitions over several years when Prosperity bought it. In each scenario—working for both the seller and the buyer—Meservey has thrived. "We had some reps who didn't want to stick around," says Meservey, talking about the Prosperity-La Grange deal in 2007. "They just didn't know what was going to happen and wanted to be coddled a little—and they assumed the worst. Looking back, leaving wasn't the best for them. If they'd kept their heads down and stayed the course, they would have been better off." Adds Meservey, who supervises 10 financial advisors: "For the ones who were patient, it was a non-issue. It turned out to be a bigger, stronger program than before."
Banks making acquisitions usually aren't doing so to dismantle them, says Brett Scheiner, a research analyst and vice president at the investment bank FBR & Co. In fact, responsible sellers seek out buyers who will retain their FAs and other employees or those affiliated with the bank once the sale is completed. "The bottom line is that brokerage programs are not an area where you cut a lot, because you want to hold on to the assets," says Scheiner. "A rep is a direct link between the bank and the customer." Moreover, once M&A deals take place, many acquiring banks tend to hire more FAs.
What adds to a financial advisor's job security, naturally, are his or her numbers. "If one bank buys another, and you're doing $500,000 and their guy is doing $250,000, who do you think they're going to keep?" asks Rusty Cloutier, president and CEO of Midsouth Bank in Lafayette, La., which has been acquiring other banks this summer.
And when a financial advisor has those good numbers, it's incumbent on the rep to make sure the new owners and bosses know what business he or she has brought to the bank.
In spite of all of those advantages on the side of FAs, it doesn't keep them from worrying.
"Traditionally, reps are type-A personalities who think the world revolves around them," notes Meservey. "I tell them they are important to a bank, but they are not its No. 1 priority."
For many financial advisors, negotiating the ups and downs of consolidation isn't something to worry about just now, because M&As aren't yet in full swing.
Indeed, this year was expected to be a busy time for bank M&A deals, especially for smaller institutions. In fact, industry observers got swept up in the euphoria of such flush deals late last year as Hancock Holdings buying Whitney National Bank for $1.5 billion and BMO Financial Group taking over M&I Bank for $4.1 billion that they predicted M&As would be going gangbusters in 2011.
Now they estimate that M&As will gain steam in the next year or two. Nonetheless, buyers and sellers are eager to get started when the time is right and engaging in legwork and due diligence.
For instance, Marti Rodamaker, president of the $1 billion First Citizens National Bank in Waterloo, Iowa, says she would buy another community bank "in a heartbeat," if she found one that's financially sound and whose values dovetail with the bank she heads. First Citizens National Bank is the result of a merger of four banks in 1994, which turned out to be highly lucrative for the institution. As a result of those acquisitions, First Citizens reports about two-thirds more in assets today, up from $350 million, and 40 percent more full-time employees, including an increase in the number of bank investment brokers and trust advisors from one to four of each.
She echoes the thoughts of other community bankers in the acquisitive mode. Because successful bankers are eager to buy, they regularly monitor the Federal Deposit Insurance Corp.'s list of distressed banks, field calls from bankers interested in selling and maintain relationships with investment bankers who monitor the community banking space.
And why not? A larger deposit base makes it easier to extend loans—and enhances the bank's name recognition—which, in turn, helps attract clients for financial advisors. "The fact that we are bigger and covering a greater population base has simply increased our business," observes J. Pat Hickman, chairman and CEO of Happy State Bank in Happy, Texas, which announced plans in September to acquire Signature Bank of Dallas for $120 million in cash.
Happy employs seven financial advisors now and expects to hire one or two more in the next year.
According to Hickman, financial advisors, like the rest of the bank, will have "more clients to market to" and "greater name ID," once the acquisition is complete. "Girth," as Hickman calls it, also helps banks shoulder regulatory costs, which have gone up, due in part to Dodd-Frank, signed into law last year.
Bankers willing to sell are actively searching for a good match. They, too, work with investment bankers and stay in touch with officers at banks that are expanding through acquisitions.
As an example, when the news broke about Happy's plans to take over Signature, bankers of other institutions took note. Hickman says he received a number of messages from other bankers along the lines of: Hey, Pat, don't forget about me.
AVOIDING THE PITFALLS
So today's reality begs the question: With willingness on both sides, why are M&As stunted? "We are at a little bit of wait-and-see," said Bill Hickey, a principal and co-head of investment banking at Sandler O'Neill, which brokers community bank M&As. "You have the volatility of bank stocks—and the stock market—and have banks out there wondering what the new normal is, if there is a new normal. Buying is down 10 to 15 percent."
This past summer, MidSouth Bank in Lafayette, La., announced plans to acquire First Louisiana National Bank as well as new branches from other banks in Dallas and Tyler, Texas. Prior to these acquisitions, Midsouth had seven financial advisors, but with its acquisitions it will add two more and has plans for yet more in the Dallas-Fort Worth area.
Once banks have found their match, the key is to make the transition as seamless as possible for all concerned, especially the customer. Among other considerations, that involves having the best IT department you can afford, notes Rodamaker. When merging two or more IT systems, an assessment is needed to determine which is the most efficient for implementation throughout the bank, says Christine Barry, research director of the Aite Group, a consulting company that focuses on bank strategy, technology and regulation. Or, it may turn out that the bank may need a whole new IT system. During this time, careful communication and follow-up with customers and employees are of particular importance, notes Barry.
Customers need to know such things as whether their financial rep will be retained and will be handling their investments, what extra fees and services they should expect and whether they will be losing services and whether their branches will remain open. FAs and bank employees must be kept in the loop about the status of their jobs within the reconfigured company and be given plenty of notice if they are to be laid off or reassigned or report to a new boss.
That said, there are still hurdles to M&A deals picking up again.
• Credit and hidden problems: Even the strictest, most thorough due diligence sometimes can't find every cache of bad loans or problems on a bank's books, says FBR's Scheiner. Add to that concern the ongoing news of sour mortgages and predatory lending practices, all of which have made potential acquirers gun-shy about purchasing a bank. "When you buy a bank, you are buying someone else's judgment," adds Scheiner. "I don't' know if it's a good time to bank on someone else's judgment."
Scheiner's reasoning rings true with Chris Cole, senior vice president and senior regulatory counsel for the Independent Community Bank Association (ICBA), an organization that advocates for community banks nationwide: "Buyers are leery. They [acquiring banks] are moving slowly because they are concerned about the asset quality and that something bad may crop up later."
• Valuations: Because of what's happening in Europe—the sovereign debt situation—and other concerns, prices have come under pressure, says Michael Kon, an analyst at Morningstar. "I would characterize the sector [of community banks] as inexpensive. On average, community banks are trading below their fair value."
Robert Hulsey, CEO of the $2.2 billion American National Bank of Texas, in Terrell, Texas, understands the problem. "There are an awful lot of bankers who are frustrated and tired," he explains. "So many of them would like to sell, but they can't at those prices. There are more people who would like to sell than there are buyers now." American National Bank acquired the $146 million Citizen's National Bank and the $92 million Dallas National Bank for an undisclosed amount before the financial crisis. Rather than buying additional institutions now, bank officers there are concentrating on making their operation more profitable, says Hulsey. His bank has seven financial advisors and six trust officers. Community bank prices hit a peak before the financial crisis, notes Morningstar's Kon, with some trading at two or three times book value. After the dip brought on by the economic crisis, an upswing came at the end of 2010 to "fair prices or slightly discounted" ones, according to Kon.
This year, as the recovery has stalled, community bank valuations have dropped again, he says. However, the depressed state of valuations can cut both ways. If banks are swapping stock to do the deal, then it's not a lucrative situation for the acquiring bank because it has to pay more for a distressed bank with its own devalued equity. Adding cash to the offer, even if some stocks are used, can seal the deal. Even better, if the consolidation is a straight cash deal, the buyer may be in the best possible situation and be able to pick up an institution at a fire-sale price.
• A solid marriage: Community bankers typically are searching for acquisitions that either round out their geographical reach and client base or allow them to move into new regions or fields of expertise. Some may be looking for a bank with a full complement of financial advisors or expertise in wealth management, while other acquirers may want to install new FAs in areas that represent the merged bank's expanded geographical reach.
For instance, Rodamaker says that she would pair up with another "rural Midwest" bank like hers in the farming areas of Iowa, Illinois, Minnesota and Wisconsin, but not one in Florida because she doesn't know the region or the players. Happy Bank has taken a different route with its planned acquisition of Signature Bank, because Hickman wants to expand beyond Happy's focus on ranching, farming, oil and gas in the Texas panhandle and establish a presence in metropolitan Dallas.
"I watched Pat [Hickman] take a little bitty bank from $10 million about 15 years ago to $1.7 billion today," says Hugh Scheurer, president of Signature, which will remain a standalone entity and maintain a separate charter within the Happy family. Scheurer himself will step down as president and join the board. "The most important thing I saw in Pat's model is service. I was looking for a bank that was as high on service as we are and one that would be good for me and my people."
• Too rosy a view: Officers of some community banks fail to realize that their institution isn't as valuable as it once was and demand too high a price, say bankers and investment bankers. "Unfortunately, a lot of community banks have a rosy view of the future," says Sandler O'Neill's Hickey. "If they read the tea leaves, assess regulatory costs as well as the current environment of depressed interest rates with a low yield curve, partnering might be their best choice, even if it does come at a significant premium." Even with the bank sector "inexpensive," as Morningstar's Kon maintains, some buyers are holding off buying and betting that prices will drop even more.
• Economy: In a word, it's stuck. After a brief period of optimism about fiscal recovery at the end of 2010, the mood has shifted and embraced the reality of high unemployment, lackluster borrowing and an unpredictable stock marker.
But the economy will come back—it always has before—and when it does it will facilitate more M&A deals. If advisors embrace the changes that may come their way, it could be a time to thrive.