Lender & Bank M&A - Stats, And What Is Working?

I thought about carpooling with some co-workers to work, but the problem is that on the way to the office we have to go through a tunnel. I'm deathly afraid of this situation. Turns out I have carpool tunnel syndrome.

 

What does Florida have that the rest of us don't? The highest percentage of cash buyers according to Zillow's latest research. There are plenty of reasons for this, but as of the second quarter of 2015 with 51 metros analyzed, cash purchases of homes were far more common in Midwestern and Southeastern markets, particularly in Florida, than in the Western U.S. The five markets with the highest percentage of all-cash home purchases were all in Florida. Metros with small shares of cash buyers tend to have younger populations, while markets with higher shares of cash buyers tend to have a larger proportion of households headed by a widow/widower. (Interestingly, among the 10 markets nationwide with the lowest share of cash buyers, only one is not in the west - Worcester, Massachusetts, with 21 percent of home purchases made with cash. Colorado Springs has the lowest share of cash buyers among large metros analyzed, at 14 percent.)

Must be something in the water causing this rash of settlements: JPMorgan Chase has settled its legal scores in the Lehman Brothers case ($1.42 billion), with the State of Ohio ($150 million), and now bond insurer Ambac Financial Group Inc. ($995 million).

 No one doubts that banking and mortgage banking will see continued mergers and acquisitions this year. STRATMOR's Jim Cameron and Jeff Babcock attended the MBA's M&A workshop last week, and Jeff wrote, "If attendance at the last week's very successful M&A Workshop conducted by the Mortgage Bankers Association is a reliable leading indicator, the industry should experience a more robust level of deal activity than any recent period. Participants were an interesting blend of motivated buyers, M&A advisors, attorneys, and a few vendors. (If there were any prospective sellers, they would have been reluctant to raise their hand to disclose their intentions.) The Workshop panelists provided experiential information and insights for both buyers and sellers, supplemented by legal/regulatory considerations and post-closing dynamics and recommendations.

 "From the vantage point of an active player in the M&A space STRATMOR had several key takeaways. In the current seller's market environment, there is significantly greater investor demand than there are attractive, well managed retail platforms available for sale. Compared with organic recruiting, today's buyers believe that an acquisition growth strategy is more efficient, less risky and maybe even more cost effective. Perception that you can buy better talent than you can hire which favors the buy vs. build option. Left largely unaddressed was what factors might motivate sellers to explore their options (note that STRATMOR, in currently representing a handful of sellers, has learned some helpful lessons).

 "Experienced sellers encouraged their peers to conduct more extensive operational due diligence on their prospective buyers before closing the deal. While it's a cliché to emphasize the critical nature of cultural compatibility, both sides clearly benefit from digging deeper into the implications of cultural practices ... maybe even retaining an advisor to provide an independent assessment. Too little attention is typically paid to planning the integration/assimilation, causing unnecessary pain and suffering during that initial transition period ... much of which could have mitigated by better project management. An experienced acquirer brings many tangible benefits and valuable lessons to the seller organization. Originator compensation compliance has been elevated to a key consideration in M&A negotiations. And at the end of the process, it's personal chemistry and 'attitude' that can make the difference between success and failure." Thanks Jeff!

 And that is just mortgage bankers. What about bank M&A? Steve Brown with PCBB writes, "We had fewer bank and thrift (bank) deals in 2015 than in 2014 and the percentage of bank deals vs. the universe of the industry was right in line with longer term averages. (During the last 10 years) you find that for any given year the percentage of banks at the end of the year is roughly about 4% less than the percentage that started the year, or about 1% per quarter.

 "In 2015, the number of bank and thrift deals was 281 according to SNL Financial. This compares to 287 (in 2014), 227 (2013), 222 (2012) and 152 (2011). According to FDIC data, the number of banks and thrifts that existed at the end of 2010 was 7,659 vs. about 6,228 that were around at the end of 2015. That means about 1,430 banks went away or about 286 per year....what this basically tells us is that for 2016 (at least historically speaking), somewhere around 2% to 4% of banks and thrifts will merge away just as they have each year prior based on the pure math of it all. That means we start 2016 with about 6,228 and it will end up around 6,100 to 5,980 or so (125 to 249 deals). To be clear, we absolutely believe the industry will continue to consolidate, just not at the same pace as some might have you believe and based on the historical data."

 Just in the last week or so we learned that in Illinois Royal Savings Bank ($205mm) will acquire Park Federal Savings Bank ($146mm) for about $240,000 in cash. Wintrust Financial ($22B, IL), a 15 bank holding company, will acquire Foundations Bank ($125mm, WI) for about $30mm in cash. mBank ($746mm, MI) will acquire The First National Bank of Eagle River ($141mm, WI) for about $12.5mm in cash. And Pinnacle Bank ($8.5B, TN) will acquire an additional 19% of Bankers Healthcare Group for about $114mm, bringing its total ownership percentage to 49%.

 On the topic of risk sharing Scott Olson wrote, "On behalf of CHLA I wanted to respond to your column about GSE up-front risk sharing, since CHLA has a different take than the MBA does on this. CHLA is very concerned about the use of up-front risk sharing and its potential negative impact on independent mortgage bankers. CHLA is particularly concerned if upfront risk sharing is done by large vertically integrated bank/securities firms, as was the case in some large J P Morgan risk sharing deals that have been done  This approach creates the opportunity for the big banks to monopolize GSE lending if upfront risk sharing securities deals are the dominant form of risk sharing.  

 "Up-front risk sharing also raises the risk of a return to significant volume discounts, if the process is done upfront and there are no protections against this. The process described in your article describes how lenders could cut deals with the PMIs - and obviously the big banks with large volume are in the position to cut the best deals. Finally, it is not clear why doing the risk sharing upfront really reduces GSE risk compared to back end risk sharing. Above all, we need more transparency about the development of risk sharing and there needs to be more focus on the impact of up-front risk sharing the ability of small and mid-size mortgage lenders to access the secondary market through the GSEs.

 "FYI, here is a link to a Housing Wire CHLA Op-Ed from November on GSE issues - just below that is excerpted paragraphs about our concerns about up-front risk sharing. 'CHLA supports risk sharing - but is concerned about up-front risk sharing through securitizations by a few big vertically integrated bank/securities firms. These mega-banks could leverage risk-sharing securitization to generate funds to exclusively originate GSE loans through an affiliated bank. There are already two such deals totaling $2 billion with JPMorgan Chase. If this becomes the dominant form of risk sharing, small and mid-size firms could be shut out of the process. FHFA and the GSEs should be fully transparent about these risk sharing deals - and should ensure that small and mid-size lenders aren't shut out - by banning practices such as volume discounts and stopping mega-banks from dominating both risk sharing securitization and underwriting of the loans they fund.'"

 There wasn't a lot to talk about in the bond markets yesterday, so I won't waste your time: there were no major economic data releases, Treasury auctions, or Fed speakers (we are in the blackout period ahead of this week's FOMC meeting). We do have some news out today, however: the November Case-Shiller 20-City Index, the November FHFA Housing Price Index, and January's Consumer Confidence. We also have a $26 billion 2-year Treasury auction. The risk-free 10-year T-Note ended Monday yielding 2.02% and in the early going today it's sitting around 2.01% and agency MBS prices are a shade better.