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Q&A: C.K. Lee of Commerce Street Capital

Gail Bennison Special to the Business Press

The Business Press sat down with mergers and acquisition (M&A) expert C.K. Lee, to discuss the current state of bank mergers and acquisitions in Texas. Lee is advising Collin Bank in Plano in the recent agreement to be acquired by McKinney-based Independent Bank Group Inc., the holding company for Independent Bank.

Lee is a managing director in the Financial Institutions Group of Commerce Street Capital LLC in Dallas. In that capacity, he assists clients with mergers and acquisitions, capital raising, balance sheet restructuring, business plan development and regulatory matters. Prior to joining Commerce Street in 2010, Lee was regional director for the Office of Thrift Supervision, Western Region, headquartered in Dallas with offices in Seattle, San Francisco and Los Angeles. He oversaw bank supervision, regulation and applications, and worked on numerous problem bank resolutions. Lee previously held positions with OTS in Washington, D.C., where he was responsible for supervision and regulation of holding companies, the agency’s international affairs, and the risk monitoring and analysis unit. Prior to joining OTS, he served as an adviser to Federal Deposit Insurance Corporation (FDIC) Chairman Donald Powell. During his tenure, he was a member of the FDIC’s senior executive team, advising on policy, operational and international issues.

Lee began his career on Capitol Hill where he served as an adviser to U. S. Sen. Connie Mack of Florida, a senior member of the Senate Banking Committee. During his tenure with Mack, Lee worked on the development and passage of key financial services legislation, debt relief for developing countries, Permanent Normal Trade Relations with China, reform of the U.S. securities markets, and the restoration and protection of the Florida Everglades. Lee received a bachelor of science degree in journalism and finance from the University of Florida and a master’s degree from the London School of Economics. He currently resides in Colleyville. “Banking is very simple,” Lee says. “You gotta get it out the door and then you gotta get it back. Mergers and acquisitions aren’t quite that simple.”

What exactly is your job in Independent Bank’s agreement to acquire Collin Bank? Commerce Street Capital is a registered broker dealer and the way we work on M&A is we act as the bank’s adviser. If you will, we’re kind of the resident expert for the banks that they hire to take them through the process – everything from establishing what a good market price might be for the bank, educating the board a lot on how we work to find a suitable buyer, and how they can not only meet the price expectations of the board, but have the financial wherewithal to accomplish the transaction and have the regulatory standing to close it. We negotiate with the bank on all aspects of the deal. If there are any particular credit issues that we have to work around in terms of bad loans, if there are particular issues related to branch operations that the buyer wants to deal with such as particular personnel they want to keep, we assist the buyer and the seller to work through the contract, which can run 60 to 70 pages.

What situations could cause a delay in the acquisition? In any merger transaction, there are a lot of potential delays. One is if there is a material adverse change. Another is a regulatory issue at one bank or the other. The definitive agreement that we typically sign between buyers and sellers contemplates what happens if there’s a delay. We have walk-away clauses that allow each party to get out if there’s something that happens that none of us contemplated. Typically, that’s very rare in our business. Most of the time there are tremendous disclosures between the parties.

The lines seem to be blurred when it comes to the similarities and differences between the terms “merger and acquisition.” Are they blurred in the Independent Bank-Collin Bank transaction? The terms are frequently used interchangeably. Acquisition is “what is the surviving entity going to be?” In this case, it’s clearly going to be the Independent Bank Group as the survivor, and the shareholders of Collin Bank will now be the shareholders in the Independent Bank organization. They are the acquirer. But typically what happens is the legal transaction that occurs is the activities, assets, liabilities and equity of Collin Bank are merged into the Independent Bank. So it’s a distinction without a difference. It’s clearly an acquisition, but it’s an acquisition where the banks are merged, and the survivor is Independent Bank. We have seen a couple of transitions in our marketplace where it’s been a true merger of equals, where you have two organizations with complementary strengths that merge together and the merger is not so much about acquisition, price and surviving organization. One good example is the Highlands Bank-ViewPoint Bank we worked on here at Commerce Street that closed last year. Highlands was a commercial bank in Dallas and ViewPoint was more a consumer mortgage bank in Plano. ViewPoint needed a CEO and Highlands had a CEO candidate. Highlands needed the size and scale of ViewPoint’s commercial lending. The banks came together and constructed a book-for-book transaction, merging the banks together at their current value. What you end up with is a larger, more diversified organization with current leadership at the top that’s in a position to grow at a faster pace than either of those banks could have done individually. We do see that pure merger transaction in our marketplace from time to time. That’s always an option that we encourage our clients to consider.

What is the current M&A climate in Texas? I would characterize the climate now as one that conversations are increasing but it’s not necessarily translating into deal activity. At the first half of the year we were on about the same pace that we were last year in our market, so we haven’t necessarily seen more deals this year. What I would say is, in terms of deals in process, they’re dramatically increased over what we saw last year in our company. This year, not only are we busy, but we’re seeing new entrants into the M&A arena every day, whether on the buy side or the sell side. We’ll see that show up in the third and fourth quarters of this year and the first and second quarters of next year. I do believe they’re accelerating.

What factors have contributed to this acceleration? Well, there are a couple of things. One is you can’t divorce what’s happening from the regulatory climate. In the wake of the financial crisis, while most of the problems were centered around very large banks and investment banks in New York, Congress, in its infinite wisdom, decided to punish everybody in the banking industry. So what you see is a tremendous compliance burden and business plan restrictions on a lot of community banks, which I think has made the community bank business model less viable long term than it was five or 10 years ago. I think the prospects for a small bank in a metropolitan area like Dallas or Houston or Austin are decreasing. If you’re a small bank with 20 employees, you just can’t have two or three employees that are non-revenue-generating focused on paperwork. It increases the cost burden, it drives down the investor propositions for the shareholder, and so what we’re seeing in a lot of these small banks coming in, is they are considering partnering up with a larger company. The second thing is the cost of doing business in urban areas with increasing rent, as an example. What we’re telling our clients is that they need at least $500 million in assets and preferably over a billion in order to drive the returns we’ve become accustomed to. So what’s happening is we’re seeing a lot of these $200 million banks looking down the road and saying that it’s a long haul to get to that place. So it’s better for shareholders to hook up with an Independent Bank with $2 billion in assets and it’s a public company. I think it’s a combination of regulatory factors and some underlying economic drivers that are pushing smaller banks to the larger table.

Is there anything else you would like to add to this discussion? What I would say to the broader business community is that there are many strong, growing and innovative community banks here in the Dallas-Fort Worth area. These banks are in as-good or better position to not only meet the product needs of our community, but also, just in terms of customer service, they’re as well-positioned as any of the banks in New York or any of the other money centers to meet the needs. I would encourage folks that are in the business community that when they’re thinking about making relationships they give some thought to the community banks around here. As a former regulator myself, I can say that the regulatory requirements on these banks as they get bigger increase exponentially. A lot of the decisions that a small bank can make in the office, a large bank is under strict rules. Shop local. There are some good options here.  

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Robert Francis
Robert is a Fort Worth native and longtime editor of the Fort Worth Business Press. He is a former president of the local Society of Professional Journalists and was a freelancer for a variety of newspapers, weeklies and magazines, including American Way, BrandWeek and InformatonWeek. A graduate of TCU, Robert has held a variety of writing and editing positions at publications such as the Grand Prairie Daily News and InfoWorld. He is also a musician and playwright.

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