There has been a lot of talk that 2021 could be a big year for bank mergers and acquisitions (M&A), possibly making up for the lack of deals in 2020. The need for scale and to invest in digital capabilities has been thrust to the forefront of the industry like perhaps no other time in banking. Historically, the banks that sell are those that receive the premium. And while that's still true, management teams of acquiring banks are getting more disciplined, searching for deals that add immediate value to earnings and tangible book value on day one, or that have relatively short earn-back periods. Just look at the big share price gains of Silicon Valley Bank and First Citizens BancShares after they announced their recent deals.
There are several ways to purchase another bank, but the main two are through cash or stock, or through a combination of the two. In general, if a bank has a strong valuation, it will likely look to do some kind of stock deal in which it exchanges its shares for the selling bank's shares. With a high valuation, or what can be referred to as a strong stock currency, the acquirer gets a better exchange ratio with the seller and therefore would be able to issue less shares in the deal, which means less share dilution for existing stock holders.
Let's look at some of the banks that have expressed an interest in buying another bank this year, and also what their cash positions and stock currencies look like.
1. Citizens Financial Group
The bulk of the consolidation is expected to occur at the regional and community bank level. Many of the super regional banks do not seem interested in whole bank M&A, at least on the surface, and are more interested in doing a non-bank acquisition that enhances the products and capabilities of their fee-based businesses. Executives from both the $205 billion asset Fifth Third Bancorp and $170 billion asset KeyCorp said on their recent earnings call that whole bank M&A is not top of mind right now.
Image source: Citizens Financial Group.
If there is one super regional bank that seems somewhat open to whole bank M&A, it's Citizens Financial Group (CFG 2.49%). CEO Bruce Van Saun said on the bank's recent earnings call that while the bank is very disciplined, it is also very open to whole bank M&A if it could find something that made sense. Bank valuations have bounced back since their big dips in the beginning and middle of 2020, so to truly have a strong stock currency right now, a bank will probably want to trade above 150% of tangible book value. But it also depends on what the seller is trading at -- many are still only around tangible book value or slightly above.
Citizens doesn't have a great stock currency right now, recently trading around 124% tangible book value, but its valuation has been growing. The bank is also at the top of its internal range in terms of the capital levels it wants to maintain, and therefore may have some capital available for a cash or part-cash deal.
2. People's United
Prior to the pandemic, the $63 billion asset People's United Financial (PBCT +0.00%) had been on a bit of an acquisition tear, announcing three smaller bank acquisitions in two years. And these deals, which came with huge cost savings, seemed to work relatively well, making the bank's expense structure more efficient and allowing the bank to pick up market share in its existing footprint. I don't know if you'll see a big landmark deal that looks more like a merger of equals (MOE), but I could certainly see People's United resuming the strategy it had been executing prior to the pandemic. The bank recently traded around 141% of tangible book value, which is not a great stock currency, but could have some ability to make something happen in the current environment.
3. New York Community Bancorp
I would fully expect the $56 billion asset New York Community Bancorp (NYCB 1.41%) to buy another bank as soon as it can find the right deal. The bank has new leadership, which has committed to changing the bank's funding base and diversifying revenue. In order to shift away from its model that has for so long relied on multi-family lending and high-cost deposits, new CEO Thomas R. Cangemi, who has worked at the bank for the last 22 years, has absolutely said that M&A is needed to make significant progress in that direction.
The bank doesn't have the greatest stock currency either, trading at about 128% tangible book value. And while its capital position is not exactly weak, it doesn't have as much excess capital as some of its peers to do a cash deal. But hopefully the bank can grow its capital position as it grows earnings this year.
4. BankUnited
Similar to many other banks on this list, the $35 billion asset BankUnited (BKU 3.87%), which is based in Florida, does not have the best stock currency, trading around 127% tangible book value. But it has a ton of excess capital and the bank is already planning to use some of that capital to repurchase shares. BankUnited president and CEO Rajinder P. Singh seems very open to M&A. On a recent earnings call, he said, "we're here to talk to anyone and everyone, any deal that makes sense we will talk but we don't lead with that."
5. Prosperity Bancshares
David Zalman, CEO of the $34 billion asset Prosperity Bancshares (PB 0.99%) based in Houston, Texas, has been very forthcoming about his thoughts on M&A, and said he is open to exploring an acquisition. In terms of what he is looking for, he said that as the bank gets bigger, he is open to deals he likely wouldn't have considered in the past.
The bank is probably in the best position of any bank on this list to make a deal, with a very strong stock currency. The bank currently trades around 234% of tangible book value and has a lot of excess capital. In 2019, Prosperity made a big move when it acquired the $10.5 billion asset LegacyTexas Bank.
6. Flagstar Bancorp
The roughly $31 billion asset Flagstar Bancorp (FBC +0.00%) based in Michigan also seems ready to make a move. CEO Alessandro DiNello said on the bank's most recent earnings call that the bank is open to business combinations, business acquisitions, or smaller deals. Furthermore, Executive Vice President Lee Smith said he thinks the bank has a strong enough stock currency to look at whole bank acquisitions that will allow the bank to enter new markets and access new customers. The bank currently only trades around 118% tangible book value, but did grow tangible book value 36% in 2020.
7. Sterling Bancorp
The nearly $30 billion asset Sterling Bancorp (STL +0.00%) based in New York currently trades around 146% tangible book value. It also has a lot of excess capital and its CEO Jack Kopnisky has expressed a desire to grow both organically and through M&A. He said he is open to buying banks that have good funding sources and that provide the ability to cut costs and get new products or enter new markets. "And frankly, there is lots of opportunity nowadays at, in my view, reasonable prices," he said on a recent earnings call.
