The Merger Floodgates Have Opened

The Merger Floodgates Have Opened

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Last May (JRN 39:18) we wrote an article entitled, ‘In the Words of Nancy Reagan, “Just Say No.”’ In that article, we reflected on the fact that some of our nation’s largest banks had been allowed to keep acquiring smaller institutions, without much, if any, regard to the fact that fewer banks means less competition and less access.

We applauded President Biden’s Executive Order to more closely scrutinize big bank mergers (July 2021). For a minute it looked like that might curtail some of the merger-mania that was running rampant across the country. And, for a minute, it did. Actually, for about 17 months. But that’s over now.

Two weeks ago, in (JRN 40:02) we reported that the pending acquisition of 4-Star MUFG Union Bank, N.A., San Francisco, CA (a/k/a Union Bank) by the 7th largest bank holding company (BHC) in the country, U.S. Bancorp, had been completed. U.S. Bancorp is the holding company of 4-Star U.S. Bank, N.A., Cincinnati, OH, which boasts $591 billion in total assets.

The transaction, on hold since September 2021, eventually received regulator approval. The merger, on paper, took place in December. While it will still take a couple of months to get the banks themselves merged, the regulatory approval is no longer a hurdle. Union Bank will add another $125 billion in assets to U.S. Bank’s balance sheet.

Nor is regulatory approval a hurdle any longer for the 23rd largest BHC, BMO Financial Corp. After 13 months in limbo, the $165 billion asset, 5-Star BMO Harris Bank, N.A., Chicago, IL expects its acquisition of 5-Star Bank of the West, San Francisco, CA, with its $92 billion in assets, to consummate on Feb. 1st.

And yet another Big Bank on track for a first quarter merger is 5-Star TD Bank, Wilmington, DE. The $394 billion bank had been waiting for the green light to acquire the 41st largest BHC and its $80 billion 5-Star First Horizon Bank, Memphis, TN. With this transaction, TD Bank, with headquarters above the border in Toronto, aims to become a Top 6 U.S. Bank by assets.

That’s a moving target these days, though, with merger approvals coming in hot and heavy. Another pending transaction, that is still waiting on regulatory approval, is that of  5-Star Washington Federal Bank, Seattle, WA to acquire the $7 billion asset 5-Star Luther Burbank Savings, Santa Rosa, CA.

While this is significantly smaller than the other transactions mentioned, Washington (a/k/a WaFd Bank) is still a Top 100 company by assets. So, while 2022 was a slow merger year compared to 2021, we can expect 2023 to more than make up for it… especially now that the floodgates have opened up.

We have been searching, not particularly successfully, for a link between growth in loans to insiders and the possibility that a bank is looking to be sold. Anecdotally, that’s a thing. But, the correlation, while sometimes present, is eluding us.

Looking at the four banks on page 1 that are being acquired, for example, Luther Burbank reports no loans to insiders and First Horizon Bank reduced its insider loans by 75% in the past two years (9/30/2020—9/30/2022). Union Bank and Bank of the West, on the other hand, each increased insider loans by about 12% over that 2-year period.

In the past two years, we focused first on the growth of insider loans and second on the relationship between the amount of insider loans as a percent of equity. We’re still looking, but this year we revised our tactic a bit. The 51 banks listed on page 5 all reported that insider loans outstanding at September 30, 2022 exceeded 47.5% of Capital (Net Worth). In this instance, we used Tier 1 Net Worth. In some cases, insider loans  decreased over the previous 12 months, but in many, the numbers are going up.

Remember, some (most) times, insider loans mean nothing other than the employee (director, family member, etc.) needs a loan. You’ll notice that most of the banks on page 5 are small, community banks, and that’s by design. They like it that way. But, being small, any increase, even just one loan to an insider, may be enough to put the bank on page 5.

What we are looking for is insider loan growth as an indicator that the bank is considering a sale. Three of the banks we highlighted for insider loan growth last year and the year before no longer exist. The first two were listed two years ago, in JRN 38:08:

Main Street Bank, Bingham Farms, MI, was the largest with $323 million in assets. It merged into the $1 billion 5-Star Superior National Bank, Hancock, MI on February 20, 2021; and

On May 1, 2021, Eagle Community Bank, Maple Grove, MN, with just $35 million in assets, merged into 5-Star Falcon National Bank, Foley, MN, an $800 million asset bank.

The third, $45 million asset North Arundel Savings Bank, Pasadena, MD, listed in JRN 39:08, was purchased on January 1, 2022 by 5-Star BayVanguard Bank, Sparrows Point, MD, which now has assets of $841 million.

As for today’s list, one bank has been acquired and another is in the process. Interesting, maybe, but no smoking gun.

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