Five deals in three days — the merger dam is about to burst, right?
Nope.
Those deals say more about what's not happening than what is. The two transactions on Tuesday and three on Thursday were low-risk; they involved substantially bigger players absorbing much smaller, privately held banks or pieces of banks. No stock volatility worries there.
These types of transactions and other deals among small players will continue at their steady pace, but the same impediments remain to a more sweeping consolidation that some once thought would be underway by now.
"It's probably a little early to see a substantial trend toward consolidation," said Jim MacNaughton, who recently became vice chairman of U.S. investment and corporate banking at BMO Capital Markets. "There are still substantial uncertain assets on banks' balance sheets."
Three of the transactions this week involved single-branch operations: The $24 million-asset Economy Co-Operative Bank in Merrimac, Mass.,
In the other two deals, Equity Bank also agreed to buy four branches in Topeka from Citizens Bank & Trust of Chillocothe, Mo., and $2 billion-asset
BNC and AmericanWest are serial acquirers that raised money from private equity last year.
The mergers and acquisitions market has two clear segments. Takeovers of companies with less than $1 billion of assets is not totally frozen like M&A among bigger banks, which is pretty much dead save for whole banks being unloaded by foreign owners. Small banks are relatively inexpensive and easy to absorb, as far as mergers go. And many of them have no public shareholders to appease, so they're removed from the upheaval in the equity markets that makes pricing bigger institutions a nightmare.
"Most of our clients are not publicly traded," John Adams, director of mergers for Sheshunoff & Co. in Austin, said. "Clearly they take note of that volatility. In our space I wouldn't say it is slowing down deal momentum."
Small banks are under the most pressure to sell because they have the most trouble making money in the face of low interest rates, tepid loan demand and higher regulatory costs.
"I suspect that consolidation is going to continue. We're still seeing real estate values go down," said Landon Brazier, the chairman of Viking. "People are saying that anybody under $1 billion [in assets] is going to have a very difficult time. I don't know if that is true. I do know that Viking at its size is spending a whole lot more dollars on compliance issues than anybody would have imagined five years ago."
For bank M&A to pick up more broadly, MacNaughton said, big uncertainties — such as loans and securities related to the beleaguered mortgage sector — need to be resolved. More banks also need to finish repaying any outstanding Troubled Asset Relief Program. "All of the credit issues will take a little time to work their way through," he said.
And when the pace of mergers picks up, most will be regional consolidations, MacNaughton predicts. For example, banks that need to improve their franchise by streamlining their expense base or adding revenue will look nearby.
"Don't expect the big banks to be acquiring other consequential institutions," he said. "There will be some roll-up of banks in geographic regions. However, it's possible that a big bank that might already be there will look to make a deal."
Firms like BMO Capital Markets, the investment and corporate banking arm of Bank of Montreal, are preparing for a busier future in the banking and insurance sectors. It recently hired MacNaughton — a 20-year veteran of Salomon Brothers who also served a few years as an outside adviser to the Federal Reserve Bank of New York — and added or promoted several other specialists. Scott Littlejohn, formerly of Bank of America Corp.'s Merrill Lynch unit, is the new head of U.S. insurance investment banking; Ariel Walsh, a BMO veteran, will be responsible for financial institutions M&A across North America. Phil Enan was named vice president in the insurance sector. Enan had been a vice president in Piper Jaffray's financial institutions group.
For now, though, many banks are circumspect.
"I wouldn't compare the time we are going through now to anything that people have seen," MacNaughton said. "That's why I think everyone today is operating with an extra measure of caution."
