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I-banks eyeing lucrative fees as large-bank M&A returns

After a long drought in $1 billion-plus bank deals, three such transactions surfaced in the last two weeks and more could be on the way.

The passage of tax reform seemed to have a chilling effect on larger transactions, with no U.S. depository acquisitions with values over $1 billion coming to market for close to 10 months. The gap marked the longest span since 2013 and 2014, when 314 days separated the transactions, keeping investment banks hungry for the lucrative fees that follow large deals. Brighter days lie ahead for bank advisers now that a trio of billion-plus deals has broken the dry spell and regulatory reform hopes to make even more rain.

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Cadence Bancorp. broke the dam May 13, announcing plans to acquire State Bank Financial Corp. for $1.4 billion, marking the first U.S. depository transaction to top $1 billion since July 2017, when MainSource Financial agreed to sell to First Financial Bancorp. Eight days later, Fifth Third Bancorp unveiled plans to purchase MB Financial Inc. for $4.7 billion, marking the fourth-largest bank deal since 2010. The next day, Independent Bank Group Inc. said it would acquire Guaranty Bancorp for $1.0 billion.

Together, the three deals serve as a reprieve from the steady supply of smaller deals that have dominated the bank M&A landscape over the last year. If the deals close, they will offer a nice payday for the seven investment banks that worked on the transactions, since larger deals tend to bring bigger fees.

Bigger deals can also lead to more roles for investment banks. Four investment banks — Goldman Sachs & Co. LLC, Raymond James & Associates, Sandler O'Neill & Partners LP and FIG Partners LLC — were involved in the Cadence and State Bank deal, with Goldman serving as the lone adviser on the buy side. The last time four investment banks had financial advisory roles on a single U.S. bank M&A transaction was in July 2017 on Valley National Bancorp's $852.1 million purchase of USAmeriBancorp Inc.

Citigroup Global Markets was the sole adviser to Fifth Third on its planned purchase of MB Financial — its second bank advisory role over $1 billion since 2017. Sandler O'Neill advised MB Financial on the transaction and has landed more $1 billion-plus deals than any other investment bank since 2013, working on 14 of those transactions.

Stephens Inc. provided a fairness opinion to Independent Bank, while Keefe Bruyette & Woods Inc. advised Guaranty on its planned sale. The deal marks KBW's seventh $1 billion-plus deal engagement in the last five years. That makes the firm tied for the second-place ranking among advisers on the transactions with J.P. Morgan Securities LLC and Goldman, though the latter two i-banks have worked on larger deals in aggregate.

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Larger deals are expected to become more common this year after tax reform dampened big-bank M&A activity over much of the last nine months. During the last few months of 2017, banks considered potential changes to the tax code, and early in 2018, institutions contemplated what a lower tax rate meant for them and their strategic plans.

Tax reform does give buyers greater ability to execute acquisitions as the legislation helped boost bank stock currencies and served as an effective capital raise for the industry. But it has also reduced some motivations to sell. The lower tax rate lifted returns at some would-be sellers to levels that their boards deemed acceptable to remain independent. Bank stock currencies have also increased since the passage of tax reform late in 2017 and seller expectations, accordingly, have risen as well.

Changes to the tax code also contributed to market volatility in the first quarter, and fluctuations in stock prices can make larger deals more challenging. It is prudent for companies to wait for market stabilization to occur before pursuing a substantial transaction. Agreeing on pricing is also easier when buyers and sellers have a better sense of the valuations for each company.

In another move that should offer even greater support for larger bank deals, President Donald Trump signed a regulatory reform law that will raise the asset threshold at which banks are deemed a systemically important financial institution to $250 billion from $50 billion. This will allow institutions to surpass the $50 billion level without facing heightened regulatory scrutiny and limitations on how they deploy their capital.

The higher threshold could increase the likelihood that the 21 institutions with $25 billion to $50 billion in assets — including New York Community Bancorp Inc., People's United Financial Inc. and First Horizon National Corp. — pursue acquisitions since they no longer fear the regulation that would come with considerable growth. Banks often prefer acquisitions that can move the needle and add 20% to 30% in additional assets. Smaller deals can be less enticing because any transaction runs the risk of a long regulatory review process, especially with the heightened scrutiny around compliance with Bank Secrecy Act and anti-money laundering provisions.

Many investors believe that a bigger pool of larger buyers would offer more potential exits for institutions with $5 billion to $25 billion. Investors could bid up some of those potential targets' stocks to include some portion of a takeout premium.

Assuming that run-up in valuation occurs, those institutions in turn will have a stronger bank stock currency, making them even more able acquirers. As they pursue deals that could move the needle, investment bankers might find themselves working on more transactions involving targets with at least $5 billion in assets, or more deals with values that could exceed $1 billion.