The cost of a bank merger
The amount of money tossed around in mergers and acquisitions is huge — but so are the costs surrounding them.
The expense of some recent and proposed midstate mergers reach seven figures and will continue to climb as the deals get done.
“At the end of the day, yes, it can be expensive with pre- and post-merger costs,” said Brian Bisignani, a principal at Post & Schell PC in Harrisburg and chairman of the practice's business and corporate practice group. “But most of the time, people wouldn't be making these deals if they weren't making money.”
In earnings and proxy reports filed with the Securities and Exchange Commission in January, Susquehanna Bancshares Inc. of Lititz revealed it had spent $885,000 on merger-related costs in the fourth quarter, while Integrity Bancshares Inc. of Camp Hill reported it had spent $683,000 in the fourth quarter on its merger with S&T Bancorp Inc.
BB&T Corp. of North Carolina, which is buying Lititz-based Susquehanna in a $2.5 billion deal, reported it spent $11 million in the fourth quarter on two mergers it is undertaking, Susquehanna and the Bank of Kentucky. BB&T officials did not respond when asked for a breakdown on each merger's cost.
BB&T has estimated the overall cost of the Susquehanna merger will be about $250 million.
S&T of Indiana, Pa., reported it had spent $700,000 on its acquisition of Integrity. It estimates the merger will cost about $9.7 million, and it will earn back that cost in about 4.8 years.
Jim Gibson, president and CEO of Integrity, said he couldn't estimate how much his company will spend in the first quarter of the year, when the merger is expected to be completed. He said it will hit seven figures “easy.”
The money Integrity reported it spent in the fourth quarter so far has gone mostly to investment bankers — Integrity hired New York City-based Sandler O'Neill to advise the company on the merger — and lawyers, Gibson said.
“It's the cost of doing business,” he said. “When you go into a merger, you know right away it's going to cost a lot of money. There's no way around it, really.”
Susquehanna officials declined comment, referring all inquiries to its proxy filing with the SEC.
Those costs are usual, said Jim Deitch, president and CEO of Lancaster County-based Teraverde Financial LLC, a consulting firm in the banking and financial industries.
“Mergers are very, very expensive,” he said. “There is a lot that goes into it. For Susquehanna to spend what it's spending, it's a relatively small amount.”
There are two types of costs associated with a merger, Deitch said. There are the professional services of attorney fees, accounting fees and other advisement costs. Those are the costs being borne by both Susquehanna and Integrity currently.
Then there are the costs of integration, including severance for workers in positions eliminated because of the merger, contract terminations for service providers, and moving from one computer system to another.
Integration costs are “by far” larger, and most don't go into effect until after a merger is completed, Deitch said. That means even though the merger costs already have been large, they're going to get much bigger and mostly will be paid by the acquiring company.
For bank mergers, Bisignani said, there are intangible values as well that make a deal attractive, such as moving into a new market — as both BB&T and S&T will be doing.
And a bank isn't just paying one law firm; it's likely paying three or more that specialize in large mergers that have explicit regulatory statutes. Many times, those kinds of law firms aren't local, and their rate scales reflect their settings in New York City, Washington, D.C., or another metropolitan market, Bisignani said.
The costs add up, said Amey Sgrignoli, president and CEO at Swatara Township-based Belco Community Credit Union, which recently absorbed one-branch Our Family Federal Credit Union in Lancaster County.
“Each situation is unique and a full investigation of the institution is required to estimate the costs associated with mergers,” she said. “In some cases the costs may outweigh the benefits of merging.”
Substantial portions of merger costs are offset by reducing redundant operational costs. That could include the closing of overlapping branches, elimination of positions or eliminating redundant expenses, Bisignani said.
S&T has said it will reduce Integrity's operating costs by 22 percent. Officials on both sides said that will include the elimination of about 30 of 130 positions at Integrity.
BB&T is looking at about $160 million in cost savings with the merger and expects to cut 32 percent of Susquehanna's noninterest expense, according to an investor presentation. Chairman and CEO Kelly S. King said he believes there will be opportunities to integrate eliminated Susquehanna positions into the BB&T fold.
What others spent on acquisitions in 2014
FNB Corp.: Closed multiple acquisitions in 2014 and reported $12.2 million in merger costs for the year.
TE Connectivity Ltd.: Made multiple acquisitions in 2014 and reported $24 million in acquisition and integration costs during its fiscal first quarter from October to December. For its fiscal year ended Sept. 27, it spent $31 million on the same line item.
National Penn Bancshares Inc.: Acquired TF Financial Corp. in 2014 and reported $2.88 million in merger costs for the year.
Mid Penn Bank Corp.: Acquiring Phoenix Bancorp Inc. of Schuylkill County and reported merger expenses of $573,000 in the fourth quarter.