Opinion: Merging U.S. Regional Banks Get the Cold Shoulder

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A bank deal in the Sunshine State has received the cold shoulder from investors. Synovus and FCB Financial on Tuesday unveiled a plan to merge their two businesses and create a southeastern U.S. lender worth around $9 billion. Financially, it’s a sound tie-up. Investors on both sides hate it, though; they wiped more than $800 million off the two banks’ combined value within minutes.

The merger takes advantage of regulatory changes. In May Congress tweaked the post-crisis Dodd-Frank Act to raise the threshold for systemically important banks from $50 billion of assets to $250 billion. That makes it easier to grow the balance sheet. Synovus assets would hit $44 billion after its latest deal.

But combinations haven’t all been received with gusto, even though It’s hard to fault the logic of putting together two geographically neighboring bank franchises with a similar mix of borrower types. Fifth Third’s acquisition of Chicago-based MB Financial two months ago set the tone: shares in the buyer immediately fell 8 percent and haven’t recovered.

Synovus looks restrained by comparison. It’s paying 2.3 times FCB’s tangible book value, whereas Fifth Third paid 2.8 times. Synovus reckons it will only take two years to earn back the 3.3 percent book-value dilution from the deal, compared with the earlier takeover’s six years to offset dilution of 7.7 percent. As a rule, 5 percent and five years is where investors’ patience ends, according to Compass Point analysts.

For investors in FCB, which was created in 2009 to vacuum up distressed lenders in what proved to be the epicenter of the financial crisis, the disappointment is understandable. They get no premium for giving up independence. Their 30 percent of the merged company is pretty much in line with their share of the pre-deal market capitalizations, total assets and forecast earnings for 2019.

That ought to reflect well on Synovus, but its shares too fell by almost 10 percent on Tuesday morning. Boosting its total assets to around $44 billion makes it less eligible for a takeover premium of its own – which was arguably baked into both banks’ valuation. Before Tuesday each was worth around 2.4 times tangible book value; that’s roughly a quarter above where they were a year ago and outpaces the KBW Nasdaq Bank Index. Investors clearly expect bank consolidation – just not the sensible kind.

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CONTEXT NEWS

– Synovus said on July 24 that it would acquire Florida-based lender FCB Financial for $2.9 billion in an all-stock transaction.

– The resulting bank would have $36 billion of deposits in the southeastern United States, mainly Florida and Georgia. The exchange ratio of just under 1.1 Synovus share for each FCB share would give shareholders of the target roughly 30 percent of the merged company.

– The company expects $40 million in annual cost savings, at a one-off cost of $105 million. FCB’s chief executive, Kent Ellert, would become executive vice president of the merged company, and president of its Florida operations.

– After the deal closes, which the companies expect to happen in the first quarter of 2019, Synovus would have $44 billion of assets.

– The level at which the United States regards banks as systemically important, and thus subject to detailed oversight by the Federal Reserve, was raised from $50 billion of assets to $250 billion in May.

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(Editing by Antony Currie and Martin Langfield)

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