Last night, it was announced that another Hamilton Capital Global Bank ETF (HGB) holding was being acquired, the second in 8 months. Along with greater EPS growth, lower regulatory risk, and higher interest rate sensitivity, this highlights one of the other reasons / themes why we prefer the U.S. mid-cap banks to their mega-cap peers: the potential for consolidation.

BNC Bancorp (BNCN), based in North Carolina, announced that it would be acquired by Pinnacle Financial Partners (PNFP), an US$11.2bln (assets) bank based in Tennessee. In BNCN, Pinnacle is acquiring a very profitable, fast-growing bank in an attractive market. The North Carolina-based mid-cap has improved its ROAA to 1.17%, grew earnings by double-digits in 2016, and has grown its assets by 26% annually (CAGR) since 2003. With expectations to reduce BNCN’s expense base by 25%, it is estimated that the deal will be over 5% accretive to PNFP’s EPS in the first full year of consolidation.

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This is an all-stock transaction for which the offering ratio and 20-day trading price of PNFP imply a ~7% premium to BNCN’s closing price on Friday (~US$1.9bln in total deal value). Although most mid-cap banks have experienced significant share price increases since the U.S. presidential election, BNCN has significantly outperformed its peers over that period (up 34% vs. the KRX up 23%).

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.

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