Small, Midsize Bank Consolidation Will Continue, M&A Adviser Says

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By Jeff Bater

Jan. 26 — Industry conditions continue to signal that consolidation among small- and midsize banks will continue in 2016, an adviser to financial firms on mergers and acquisitions said during a webinar sponsored by Bloomberg BNA.

Joseph Stangl, a principal in the investment banking group Sandler O'Neill & Partners, said about 300 transactions occurred in 2014 and 2015, and nearly all involved community and small regional banks. Despite recent stock market volatility, deals are still being announced, he added.

“Industry conditions continue to indicate that consolidation is inevitable,” Stangl said. “Scale is extremely important. The operating environment for banks has been challenging for several years, indicating that the larger banks are able to operate more efficiently than smaller banks. So buyers with excess capital and limited growth prospects are looking to acquisitions to drive shareholder value and hopefully future stock appreciation.”

Bank Stock Valuations Appealing

The stock valuations of financial institutions looking to make acquisitions have improved significantly from the financial crisis' lows, Stangl said, yet remain at historically attractive levels from a potential seller's perspective.

“And that's important,” he added. “The seller would look to trade into a reasonably valued stock to hopefully continue to be able to get appreciation in the future.”

Some sellers, however, cling to memories of the premiums to tangible book value before the crisis, Stangl said. “But I think most small and midsize banks are realizing those days are behind us and that merging may be their best strategic alternative right now.”

New Banks Scarce

Since the crisis, the number of new bank charters has been limited. Stangl said he expects the number of de novo banks will continue to be light. “While the regulatory environment seems to be more accommodating toward looking at and possibly approving de novos, the operating environment is not. Investors are hesitant to invest in a de novo since banks have such a difficult operating environment and returns on equity while the bank is operating and also returns on sale of the bank in the future are much lower than historical norms and not attractive to many investors at least on the de novo formation front.”

Aside from Stangl, participants in the webinar titled “Community and Small Regional Bank Mergers” included Robert Kunisch Jr., the president of 1st Mariner Bank in Baltimore, and three Venable partners: Michael D. Schiffer, John B. Beaty, and Ronald Glancz.

Merger Challenges

Kunisch said bank acquisitions will continue in his market. A group of investors bought 1st Mariner in 2014, and Kunisch, when asked to describe the challenges involved in acquisitions, said putting different cultures together takes effort.

“On the diligence front, we spend most of the time on loan portfolios,” Kunisch said. “That is why banks fail, for the most part, is because of bad loans.

“We hire a third party to go in and do our cybersecurity analysis,” he continued. “Lastly, getting your hands around legacy, liability issues — because the day you close your transaction, you inherit those.

“You are responsible for mortgages originated back in 1999 and 2000 and 2005,” Kunisch said. “If there are BSA [Bank Secrecy Act] issues, you inherit those.”

Schiffer recommended that parties give thought to the regulators who will review the transaction. “Even before you're bringing a deal to them, my recommendation is you let them know the strategy,” he said. “What is the bank strategy over the next five years?”

“If you're a bank looking to sell yourself, having frank discussions with the regulators is helpful to you because it may alert you to early issues that you're never going to get around. By having some early indications from regulators of concerns they may have, it may put you in a position to mitigate those issues before you get too far down the path, Schiffer said. “Why waste the time of negotiating an agreement if there's such underlying issues with your own bank that the regulators are unlikely to approve any transaction?”

Speaking about the regulatory climate, Beaty said implementation of the 2010 Dodd-Frank law should be nearly finished.

“There are some rules still to come, but the uncertainty that has existed over the prior years has been greatly reduced,” he said. “We are seeing a quieting down of the regulatory angst. Now, of course, we can go back to our normal angst about what is Congress going to do but hopefully that will be another year before we see major changes that way.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo in Washington at mferullo@bna.com