Why M&A Can Break the Bank, Not Save It

Bank M&A is chemistry in a lot of ways. Some things go well together and others, well, explode in the practitioners' faces.

Peter Benoist, the president and chief executive of Enterprise Financial Services (EFSC) in St.Louis, is applying the lessons of what worked and what didn't work in his career as he plots his company's acquisition plans.

He is also turning to advice from Keene Turner, whom the $3.2 billion-asset company hired in the fall to be a fresh set of eyes on its strategy.

Benoist and Turner sat down to discuss M&A trends with American Banker on Jan. 27 at Bank Director magazine's "Acquire or Be Acquired" conference in Phoenix. Here is an edited version of the conversation.

We are at an M&A conference. What's your interest or appetite?

PETER BENOIST: We are opportunistic. What we tend to try and understand is where there is true franchise value in acquisitions, instead of just adding assets. We are trying to discern that with the presumption that there are a few pearls out there. If we can find those pearls in alignment with our strategic initiatives we are going to work hard on that. We are in the research phase now.

What are those strategic initiatives that you're trying to fill through M&A?

BENOIST: Core funding is clearly one. Talent is another. There are some strategic initiatives — take mortgage for example, because we bought a company in 2013 — that can be expanded via acquisition. Another fee-related one would be wealth management. So organizations strong in wealth management that have the ability to help us leverage what we are doing. What I'm saying by default is that we are not focused on trying to get into new lines of business or getting outside of our core competency.

How does Turner, your new CFO, play into your M&A strategy?

BENOIST: Keene joined us in October. He comes from National Penn Bancshares (NPBC) in eastern Pennsylvania. One of the things I liked about bringing Keene on is that, No. 1, he has a different perspective than us. We tend to believe our B.S. and I want to make sure we don't and Keene is objective in that regard. And he brings a different talent set than what we've had in the context of how one looks at acquisitions.

KEENE TURNER: I'm trying to learn the market, too. So it allows us to be a little bit more objective and quantitative, versus qualitative or predisposed.

You also have operations here in Phoenix and in Kansas City. Do you have M&A goals in those secondary markets?

BENOIST: In priority order, the best opportunity for us to leverage performance is in Kansas City. We've done four loss-share transactions for failed banks. The largest one we did was in Kansas City, and it positioned us to take advantage of brand awareness. In Phoenix, there are not a lot of opportunities in the context of adding franchise value. We haven't done enough work yet, but our current indication right now is that we don't see a lot of opportunity. We did three Federal Deposit Insurance Corp. transactions that accelerated our growth [in Phoenix], but now we are focused on organic growth. [The Phoenix] market is really beginning to rebound.

You entered the Arizona market through those acquisitions.

BENOIST: Initially, that was not our plan. We were in the process of chartering when the crisis hit. We'd hired Jack Barry, then head of Marshall & Ilsley's commercial and industrial lending, to run the market for us. He was building the team, he was doing a local equity raise to get interest in the bank, but then the FDIC put the kibosh on all chartering. Then the assisted opportunities became our way to enter the market. It actually turned out to be a plus. We didn't need to invest capital.

What else are you seeing in the M&A market overall?

BENOIST: I [was on a panel at the conference with] Steve Kent of River Branch Capital, and I was thinking about this. I joined Enterprise in 2002 and at the time Steve was with Keefe, Bruyette & Woods. We worked on an in-market deal in St. Louis in 2003. It was a bank we coveted.

It hit all the things we talked about earlier. If you had a strategic initiative and you had the right target and the right opportunity to do a deal, that was the one we were going to do. It was the best deal we never did. We got outbid by [a larger rival] and I mean really outbid. It was overpaying and did no due diligence on the portfolio. It turned out to not be a good deal for them, so it turned out to be a great deal we never did.

So, the point is I'm a firm believer that acquisitions are not a strategy. I don't think they can be. I think they can be a tactic to assist in your growth strategy but they can't be a strategy for growth.

The other side of the coin — because we aren't perfect — is two deals we did in Kansas City in 2006 and early 2007. Two things went wrong. We were focused on northern Kansas City where the market growth was projected to be. And, two, smaller community banks are often heavily invested in commercial real estate. Well, the market went south, it didn't go north. And then the real estate crisis hit.

We made assumptions relative to where we thought strategically things made a lot of sense, and it didn't work out well for us. Luckily, they were both small deals. So my view towards acquisitions now is cautionary. Don't get deal fever. Bankers have a tendency to do that.

The so-called merger-of-equal deal structure has been a major discussion point in the industry lately and at this conference particularly. Does that structure appeal to you?

BENOIST: My short answer is no. I do understand the market's reaction where everyone is getting rewarded, which I think is surprising even to the investment bankers.

For us, we are unique. We are a very focused commercial bank. If you look at our loan book, true C&I — not including owner-occupied C&I, just pure C&I — is 50% of our loan book and we've spent a large amount of effort and time in building this model. It is very hard to find a like institution to combine with that has the same characteristics that we do. We think those characteristics over the long term are going to drive better shareholder value, because they are relationship-based and provide annuitized revenue.

The quality of the earnings stream is better. Do we want to dilute that by combining with a like-sized institution that has a different model? We find that to be a difficult decision to make. Doesn't mean we wouldn't consider that kind of transaction, but it is not a high one on our list of priorities.

TURNER: I like that more are happening on the smaller end of the spectrum, because it will make for a lot of institutions making better opportunities for us on the M&A side. Maybe there will be more targets that are of a desirable size and are focused on driving shareholder value, a combo that facilitates more M&A for us.