Branch sales and acquisitions are often driven by the selling bank's motivations, a notion embodied in the eight multi-branch sales in 2016.
The year saw several transactions resulting from forced divestments, a decision to strategically swap locations and a sale that served as a de facto capital raise to sustain a troubled institution. The year also saw increasing deposit premiums as the amount of deposits transferred fell year over year. Deposits stand to become increasingly valuable as interest rates increase and loan demand potentially picks up, and opportunities to acquire them in bulk seem to be increasingly scarce. Overall, there were 56 branch sales during the year with a median deposit premium of 3.54%; in 2015, there were 84 branch deals with a median deposit premium of 2.55%.
A variety of factors could be driving deposit premiums in branch deals and they vary on a deal-by-deal basis, said Boenning & Scattergood managing director Michael Voinovich. He said the number of branches in a transaction can drive up the premium, as well as inclusion of loans or a selection of customers who stay with the new bank following the deal.
"If you can get the perfect combination of all of those conditions, you could really set yourself up for a great premium," he said.
In 2016, two regional banks completing deals made up the majority of branches sold in deals and helped push up deposit premiums. Both Huntington Bancshares Inc. and KeyCorp divested sets of branches in 2016, motivated by their desires to close the acquisitions of FirstMerit Corp. and First Niagara Financial Group Inc. respectively. KeyCorp sold 18 branches and $1.8 billion in deposits in western New York to Warren, Pa.-based Northwest Bancshares Inc. unit Northwest Bank in April 2016; the sale carried a deposit premium of 4.50%. Voinovich advised Northwest on the acquisition and said the deal allowed the bank to "considerably accelerate" its growth in an existing footprint compared to what was feasible through a de novo branching strategy.
Shortly after, the bank was involved in another branch sale, this time as the seller. The bank exited the Maryland market in January with the sale of three branches to Easton, Md.-based Shore United Bank; the deal included $216 million in deposits and carried an 8.0% premium. Voinovich was not involved in the deal but said it made "a ton of sense" given Northwest's investment in its northern footprint that made the southern one "less strategically significant" and a potential "distraction."
"If you divest yourself of a noncore market and get a huge premium like they did, then that's a very sound decision," he said.
Northwest Bancshares did not return calls for comment.
Branch sales in 2016 also included a motivated sale that effectively recapitalized troubled First NBC Bank Holding Co. by unloading liabilities in key locations to an interested seller. First NBC, faced with difficult decisions regarding credit and capital, chose to sell nine branches, $511 million in deposits and $1.3 billion in loans to Whitney Bank, a unit of Hancock Holding Co., just before year-end. First NBC, which called the deal "a major milestone," will receive cash in the transaction equal to the difference between the loans purchased and liabilities assumed at deal completion, which is currently estimated to be about $178 million. The deal carried a franchise premium of 8.61%, which Hancock management said reflected that they do not view it as a traditional branch transaction, but rather the purchase of an earnings steam.
While Hancock is interested in doing branch transactions generally, CFO Michael Achary underscored that this deal was a "win-win" for all parties. Hancock and its shareholder were able to purchase an attractive earnings stream and deepen relationships in an important market, and First NBC was able to shrink the size of its bank, add liquidity and increase its regulatory capital ratios by 300 to 400 basis points.
Going forward, deposit premiums may continue to edge up as overall transactions continue to decline, the economy strengthens and loan demand picks up, said David Kerstein, president of Peak Performance Consulting Group. For years, many banks have had excess deposits to deploy into loans, but as loan-to-deposit ratios increase as interest rates rise, they may begin to feel pressure to add liquidity.
"Deposit rates will lag and won't rise as rapidly [as loans], but deposits are starting to become more valuable," he said.
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