Prior to the pandemic, People's United Financial (NASDAQ:PBCT) had been on an acquisition run that looked like it was just getting started.
Revisions to the Dodd-Frank Act in 2018 greatly increased the asset threshold for banks to be considered "systemically important financial institutions." That freed People's United -- currently around $60 billion in assets -- to grow without having to take on additional regulatory burdens. Between June 2018 and July 2019, the Connecticut-based bank announced that it would acquire three smaller banks, and I think investors were starting to come around to the bank's acquisition model.
The coronavirus pandemic has put this on hold, but will People's United soon be able to get back to acquisitions? Let's take a look.
The value of the acquisitions
In 2018 and 2019, People's United acquired the $3 billion First Connecticut Bancorp, the $3 billion BSB Bancorp in the Greater Boston area, and the $7 billion United Financial Bancorp, also in Connecticut. The deals all had a fairly similar theme: People's United would acquire the banks in an all-stock deal that would result in a little bit of earnings accretion but lots of cost savings. People's United was able to cut roughly half of BSB's total non-interest expense, while taking out 55% of its own non-interest expenses. The cost savings were mainly achieved through branch closures and staff reductions.
The deals have greatly helped People's United improve its expense structure. The bank's efficiency ratio -- a measure of a bank's total expenses expressed as a percentage of total revenue (lower is better) -- dropped to 53.8% at the end of the third quarter, which is a very solid number for a bank of People's United's size. That's down 3 percentage points from the third quarter of 2019 and close to 5 percentage points from the second quarter of 2018, when the bank began its acquisition run.
Conditions are improving?
In April, People's United CEO Jack Barnes confirmed to analysts that mergers and acquisitions (M&A) activity would be put on hold until the uncertainty from the pandemic cleared. But some of that uncertainty has gone away. Loan deferrals at the bank that were granted as a result of the pandemic have dropped from about 15.8% of total loans at the end of the second quarter to roughly 3.5% of total loans at the end of the third quarter. Barnes added that deferrals have continued to drop since the close of the third quarter.
We also know from the last three acquisitions that People's United likes to use its stock currency to make acquisitions, and the bank has gotten some of its value back. At $10.75 per share as of Thursday's close, the stock was trading at about 104% of tangible book value.
|Acquired Bank||People's United TBV||Acquired Bank TBV|
|United Financial Bancorp||177x||135x|
As you can see above, the gap between tangible book valuations was not huge in People's United's last two acquisitions. Currently above tangible book value, People's United's is higher than some potential targets, as bank valuations have been depressed. One bank that I have long thought would be a good acquisition candidate for People's United is the $2 billion asset Bankwell Financial Group, based in New Canaan, Connecticut. At Thursday's close, the bank was trading at about 73% of tangible book value, according to the bank's tangible book value per share at the end of the second quarter. Another potentially larger target I could see People's United maybe being interested in is the roughly $13 billion asset Berkshire Hills Bancorp, which was trading at 57% of tangible book value.
When will it resume acquisitions?
Given that conditions have begun to improve and bank M&A has started to pick up, I don't think it would be unreasonable to see People's United buy another bank in the near term if the opportunity arose. However, although People's United stock has greatly improved in the last month and deferrals have come down, coronavirus cases have begun to surge all over the country and most experts expect a tough winter ahead. That could result in a second round of shelter-in-place orders in some states, or require banks to maybe do more deferrals again, which could create the same type of uncertainty the bank faced in April.
And remember, banks have to want to be sold for a deal to happen. Acquisition targets may want to wait for another round of stimulus or until the economy improves, so they can get their own stock price and valuation up to fetch a better deal before raising their hands. There is no certainty that anything will happen soon, but given the way the acquisitions have benefited People's United's efficiency ratio, I am sure the bank would at the very least consider a deal right now if it's out there.