Monday, November 21, 2022

Debunked! Are Bank Merger Approvals Taking Longer?

I enjoy my Twitter community because I get diverse views on banking, sports, politics and entertainment. One of my Tweeps, Rick Childs, a Crowe partner, recently tweeted about the amount of time it is taking merger deals to get regulatory approval. His numbers are raw, and buck the conventional wisdom that regulators are dragging their feet on approvals. A conventional wisdom that our clients are asking us about, so it is tremendously beneficial to have actual data, instead of my standard answer: "we haven't noticed it at smaller bank deals." Data rules.

Conventional wisdom must result in actual wisdom, right?

Average Months From Announcement to Closing

Average Months From Announcement to Closing (Terminated Deals Separate)

Average Months From Announcement to Closing by Asset Size

Average Months From Announcement to Closing by NPA/Assets

Average Months From Announcement to Closing by Tang. Eq./Assets

Average Months From Announcement to Closing by ROA

Average Months From Announcement to Closing In-State vs. Out-of-State Acquirors

Average Months From Announcement to Closing for Merger of Equals

There you have it. Merger deals are taking no longer from announcement to closing this year versus recent history. Terminated deals intuitively take longer because the regulatory approach is not to reject the merger, but to inflict pain on the parties until they withdraw their application and subsequently terminate, a process that obviously would take longer.

Larger deals are taking longer, as has been the case in recent history. I should note there is likely a smaller universe to calculate averages, that likely skew the numbers for >$50B bank deals. Also intuitive is bank deals where targets have lower capital levels and profitability (ROA) took longer.

Not intuitive is that there doesn't seem to be a correlation between the seller's asset quality and time to complete a deal. And rounding out Rick's deep dive into the merger completion timeline rabbit hole, MOE's and out-of-state transactions take longer for approval.

There you have it. Now bankers don't have to rely on investment banker opinion as to the length of time it takes deals to get done. 

Thank you to Rick Childs and the Crowe researchers for keeping us steeped in facts!

~ Jeff

Friday, November 04, 2022

Bankers: Can You Create a Culture of Operating Discipline Even if You Have No or Few Shareholders?

Do shareholders give publicly traded financial institutions an edge over their private and non-shareholder owned financial institution brethren?

I posed this question while speaking at a recent conference. The following slides were used to make my case.

            Source: S&P Capital IQ for Banks-Savings Banks and Credit Unions between $1B-$10B in total assets. YTD=June 30, 2022.

Banks-Savings Banks (SBs) between $1B-$10B in total assets have a slight edge in Yield on Loans to the similarly sized CUs, which makes sense because there would be more commercial loans and relatively fewer residential loans than Credit Unions. Credit Unions held an edge in the Cost of Interest-Bearing Liabilities until 2020 when their cost eclipsed that of Banks-SBs. This might speak to the deposit betas being higher in Credit Unions than banks, as CUs would tend to have less core business and municipal accounts. All of this led to a slight edge in Net Interest Margin in Banks-SBs. Eleven basis points YTD to be exact.

Credit Unions, however, have a noticeable edge in Fee Income to Average Assets, 1.14% YTD versus 0.64% for Banks-SBs. Before my bank friends acclaim "aha, credit unions charge more fees than banks!", I will say you would be correct in fact but the context is nuanced. Although it is my experience that CUs do collect a relatively greater amount of deposit fees than Banks, this can be partly attributable to the average balances per account at CUs. They are lower than banks. It is intuitive that they would collect more deposit fees.

This nuance would be totally lost on Rohit Chopra of the CFPB. So naturally CUs are in alignment with Banks-SBs against the CFPB's crusade against "junk fees." 

Back to my point. CUs generate as much if not more revenue off of their balance sheet than banks. So why is their profitability in the form of Return on Average Assets ("ROA") noticeably and consistently inferior to banks? Twenty-seven basis points YTD inferior. Even though they pay no federal corporate income taxes?

Look no further than their expense ratio (non-interest expense / average assets). YTD the Bank-SB expense ratio was 2.27%. CUs was 2.86%. A 59 bps difference! If the median size credit union from the $1B-$10B group I analyzed achieved the bank versus the credit union expense ratio, the CU would make $11.8 million more in profit.

The CU would counter that they are a not for profit, and don't have sharholders as a constituency. Mutual banks would counter with the same. And while true that shareholders are not a constituency for either, I call bullshit on either of them not needing profits. Retained earnings is their least expensive form of capital. In some cases, their only form of capital. And for those uninitiated in balance sheets, retained earnings are generated from profits!

Now, perhaps, the lost $11.8 million is somehow benefiting one of the other three stakeholders: employees, customers, or communities. It wouldn't be benefiting customers in terms of fees or interest rates, as the analysis above shows. And the $11.8 million is from the expense ratio which has nothing to do with rates or fees.

It could be benefitting employees in the form of better compensation, benefits, etc. Or in the form of better technology. But I know of no credit union that pays their employees materially above market wages or has materially better tech than their banking brethren. I don't have the data or CU by CU analysis to make a definitive BS call, but let's say I'm skeptical.

Where I think the excess $11.8 million resides is buried in bureaucracy and infrastructure. They don't have to answer to shareholders, so the discipline of maximizing profitability for the benefit of stakeholders so often enforced by shareholders is not part of their culture. 

And it's a shame. Because if they had that $11.8 million, imagine the tech investments, employee initiatives, core deposit special dividends, or community support they can provide. 

For those that are not shareholder owned or are privately held, implement cultural operating discipline so you have the resources to be relevant, even important to the other stakeholders.

~ Jeff