There were plenty of bank mergers and acquisitions (M&A) in the first half of 2021, as M&A in the sector rebounded following a slowdown in 2020 due to the coronavirus pandemic. And while M&A this year is not outpacing activity in 2018 and 2019 in terms of number of deals, the deals have been larger than in previous years when you look at the amount of assets already sold through the first six months. Let's take a look at the largest deals through the first half of this year and see if they were good moves or not.
1. M&T acquires People's United
In February, M&T Bank (NYSE:MTB), based in Buffalo, New York, bought People's United Financial (NASDAQ:PBCT), based in Bridgeport, Connecticut, for $7.6 billion to create a roughly $200 billion asset bank in the Northeast. The deal will be immediately accretive to M&T's tangible book value (TBV) (equity minus intangible assets and goodwill) upon closing, meaning it will immediately boost M&T's TBV. The deal is also expected to be accretive to M&T's earnings per share (EPS) by 10% to 12% in 2023, meaning M&T's earnings with People's United attached will be 10% to 12% higher than what its earnings are expected to be on a stand-alone basis in 2023.
The deal looks like a good move because it doesn't dilute M&T's shareholders, while creating a very dense footprint around Buffalo, Boston, and Washington, D.C., where almost everything in is within a seven-hour drive. This should allow for lots of efficiencies and cross-selling opportunities.
2. NYCB acquires Flagstar
New York Community Bancorp (NYSE:NYCB) reached into Michigan to acquire Flagstar Bancorp (NYSE:FBC) for $2.6 billion, creating a bank with roughly $87 billion in assets. The acquisition will give NYCB a presence in New York, New Jersey, Ohio, Florida, Arizona, Michigan, Indiana, Wisconsin, Ohio, and a small presence in California. NYCB CEO Thomas Cangemi and analysts believed the merger to be necessary, as the bank looks to transition from a thrift model with mostly fixed-rate loans and higher-cost funding sources into the commercial banking model more commonly seen today.
The acquisition succeeded on several fronts by not diluting TBV, maintaining NYCB's high dividend yield, and making progress on NYCB's goal of transforming its loan and funding mix. But NYCB still has a lot of work to do on its transition, so investors may still want to see more work done before getting behind the bank, which has struggled to grow its stock price for a while now. But I think it was a good start by NYCB, especially considering that the bank doesn't have a strong valuation, which can make finding financially attractive acquisitions more difficult.
3. Webster and Sterling merger of equals
Bankers call it a merger of equals (MOE) when two institutions, usually around the same size in terms of assets, merge with the intention of building a new bank that plans to continue on with large parts of each institution and their various business lines. In this deal, the $33 billion Webster Financial (NYSE:WBS) based in Connecticut is partnering with the roughly $30 billion asset Sterling Bancorp (NYSE:STL) based in New York to create a roughly $64 billion asset bank. Webster is the surviving entity and brand.
More banks are turning to MOEs right now as they try to add scale by spreading a larger stream of revenue over a smaller expense base to increase profits and create more capacity to invest in technology and compete with the larger players. The Webster and Sterling tie-up certainly looks compelling on paper, and both banks have some unique competitive advantages. Webster operates a national health savings account (HSA) business that helps drive a very low-cost and sticky deposit base, while Sterling runs some specialized lending lines and is rolling out a banking-as-a-service (BaaS) operation. The bigger balance sheet will also allow the combined bank to make larger loans.
But MOEs are also more complex and tougher to analyze because it is such a big change for the existing banks, and Webster and Sterling were already high-performing banks. So, while I think this deal has great potential, progress on all MOEs needs to be watched carefully.
4. Old National and First Midwest MOE
The nearly $24 billion asset Old National Bancorp (NASDAQ:ONB) announced that it would join hands with the $21 billion First Midwest Bancorp (NASDAQ:FMBI) in another MOE that would create a roughly $45 billion asset bank in the Midwest. Old National, the technical buyer in the deal who will also be the surviving entity and brand, will purchase First Midwest in an all-stock deal valued at $2.5 billion. The deal will dilute Old National's TBV by more than 8% upon closing and take more than three years to earn back. That's fairly dilutive and the other big MOEs were much less dilutive, so I would really want to see how things progress before getting on board with this deal.
5. BancorpSouth and Cadence MOE
In a third MOE, BancorpSouth (NYSE:BXS) announced it would partner with Cadence Bancorporation (NYSE:CADE) to create a roughly $44 billion asset bank in the South with a presence in Texas, Georgia, Mississippi, and Alabama. The deal is a bit different than the others as BancorpSouth will be the legal surviving entity and buyer, but the banks will unite under the Cadence Bank brand with a slightly different logo. The board of directors of the combined bank will also grow to 20 members.
Although Cadence has had some credit issues in the past, this deal looks solid because BancorpSouth is able to enter the attractive Texas banking market without diluting its TBV. BancorpSouth also took an extremely conservative gross credit mark on Cadence's loan portfolio, so I do feel management is thinking conservatively about Cadence's past, although it will certainly be important to watch credit quality closely as the deal progresses.
6. Citizens' branch deal with HSBC
Smaller than the other deals but still meaningful, the $187 billion asset Citizens Financial Group (NYSE:CFG) based in Rhode Island announced that it would purchase 80 branches from the U.S. banking division of HSBC (NYSE:HSBC). Citizens is getting 66 branches in the New York City area, nine in the mid-Atlantic and Washington, D.C., area, and five in southeast Florida. The deal comes with $9 billion of cheap deposits and $2.2 billion in loans, mostly residential mortgages.
The deal looks promising because it gives Citizens more liquidity to use down the line when loan growth comes back, while also reducing the bank's cost of deposits. With the 66 New York City branches, Citizens also fills in a key hole in its geographic footprint. Lastly, the deal gives Citizens a lot of online-only customers who could be a great fit for the national digital consumer bank it has been building, called Citizens Access.