The titans of industry are getting back into the merger game. But in the banking sector, it is the little guys driving the boom.
As the number of bank mergers heads toward its fourth consecutive year of growth, the pace is accelerating. Overall, lenders have announced 87 deals through mid-May, a 32% jump over the same period a year ago and more than double last year’s 14% increase, according to data from SNL Financial.
The pickup shows how slow revenue growth and a tough regulatory environment are prompting small banks to look for partners.
“We’re in the early stages of a new cycle,” said
Brian Sterling, co-head of investment banking at Sandler O’Neill. The broader merger market is being dominated by big transactions. While the total number of announced deals is down 4.9% this year, the dollar value of the transactions has shot up 86%, according to Dealogic. One of the biggest of the year:AT&T Inc.’s recent agreement to acquire DirecTV for $49 billion.
The dollar value of bank deals, by contrast, is up a more modest 75%. Of the 58 transactions so far this year for which values have been publicly disclosed, 43 are less than $100 million, according to SNL Financial. The largest so far: Southside Bancshares Inc.’s $313.87 million announced purchase of OmniAmerican Bancorp Inc. in April.
The main driver for the uptick in small-bank deals, bankers said, is regulatory costs. Banks have had to beef up their compliance teams and hire more internal audit staff, making it more difficult to remain profitable at a time when low interest rates already are squeezing profit margins.
“Everywhere I go it is the same story,” said John W. Allison,chief executive of Home BancShares Inc., a Conway, Ark., lender with $6.8 billion in assets that agreed last month to buy Florida Traditions Bank, which has $312 million in assets.
Bank executives at smaller firms say “we’re tired and the regulators are beating us up. We need more capital and we can’t raise additional capital,” said Mr. Allison, who has overseen the acquisitions of four banks since 2012.
“Scale matters these days,” said George Makris, CEO of Simmons First National Corp., a $4.4 billion-in-assets lender based in Arkansas. In the past six months Simmons has announced or closed three deals for banks with assets between $53 million and $245 million.
There are other signs the bank merger market is heating up. Data from Keefe, Bruyette & Woods show that there are more potential buyers per bank deal now than in the past couple of years. Between 2011 and 2013, KBW saw multiple final bidders on just 35% of deals for which it was an adviser. So far in 2014, 60% of the deals it has advised on have seen multiple final bidders.
The presence of more buyers is allowing sellers to command higher valuations, raising the likelihood they will agree to sell, said KBW Co-Head of Investment Banking Rick Maples.
Aging management is another factor helping to drive bank deals as CEOs look to sell before they retire. Data from Sandler shows that the average age of a bank CEO is 59.6, up from 58.6 a year ago and 55.2 in 2006.
While the number of deals announced so far this year is the highest since the 106 announced in the same period in 2007, the value of announced deals remains well below the $45 billion worth of deals announced in 2007, when combinations of bigger banks were more common.
The average deal value plummeted sharply in the years around the financial crisis, as the nation’s biggest banks reeled from the impact of poor credit and were forced to focus on shoring up their balance sheets.
Bigger banks aren’t making deals nowadays because stricter capital requirements and a cap on the total deposits a single bank can amass following a merger are preventing them from growing larger through deals, analysts said. “The Federal Reserve is very reluctant to allow any bank with over $250 billion in assets to make an acquisition,” said Gerard Cassidy, an analyst with RBC. The Federal Reserve declined to comment.
Setbacks to a pending deal between M&T Bank Corp.and Hudson City Bancorp Inc.have served as a red flag to midsize banks, say those in the industry.
But analysts at Citigroup predicted Thursday that the deal environment for bigger banks will thaw and that a bank with more than $100 billion in assets could make a purchase by the end of next year.
In the meantime, most deals involving big banks are for bits and pieces, not whole-company mergers.
Bank of New York Mellon Corp. on Tuesday confirmed it is exploring a potential sale of its corporate trust business, a deal some have speculated will be worth more than $2 billion.