Why Bankers Are Upbeat About M&A -- to a Point

PHOENIX — Perhaps it is the warm weather here, but bankers and their advisors seem a whole lot happier these days.

Granted, potential buzzkills abound: the economic recovery has been tepid, earnings are doing OK but not great, bank stocks likely won't see another 40% run-up this year and regulations keep coming.

Yet here in the desert at Bank Director magazine's annual "Acquire or Be Acquired" conference, there was an overarching sense that the industry has stopped dwelling on the past and is focused on moving forward.

"It is still an unsettling time, but banks — both sellers and buyers — are trying to find the right solutions for their company," said Melanie Dressel, the chief executive of the $7.2 billion-asset Columbia Banking System (COLB) in Tacoma, Wash., which bought West Coast Bancorp in Oregon last spring.

Perceptions that 2013 was a better year for banking, and that this January has been strong for community bank M&A, seem to be their sources of confidence.

The number of deals was essentially the same last year as the year before (227 to 223), but prices inched up (an average price to tangible book value of 127%, vs. 119%), and more deals were structured — or at least billed — as mergers of equals. Moreover, the deals that happened last year seemed to matter a bit more than they had in the last few years.

Now, here's where the moods comes back to earth: don't expect 2014 to be a banner year for deal volume, bankers and advisors warn.

The pace is expected to track that of the last couple of years — about 50 transactions a quarter.

To be sure, a few markets, such as Atlanta, could see more open bank M&A in the coming year as worries over asset quality wane, says Curtis Carpenter, a managing director at Sheshunoff Consulting. (A bank CEO and a director from Atlanta whom I met the previous night nodded and shifted in their chairs as Carpenter made that comment.)

The merger deals, including the one Yadkin Financial (YDKN) and VantageSouth Bancshares announced on Monday, were a focal point of the conference. Given the industry's focus on efficiency and scale, such deals are highly appealing, said Bill Crawford, the CEO of Rockville Financial (RCKB), which is acquiring United Financial (UBNK) in an MOE-like deal. Rockville and United learned during due diligence that each company had conducted efficiency studies that had recommended similar improvements.

"We decided it was better to implement the studies as one $5 billion-asset bank, rather than a couple of $2 billion-asset banks," Crawford said.

Chatter — nay, complaints — about the regulatory environment are typical at such conferences, but the attention this year was decidedly focused on compliance now that the industry's safety-and-soundness issues have been dealt with.

Compliance matters have slowed down approvals of several deals lately, most famously M&T Bank's (MTB) agreement to buy Hudson City Bancorp (HCBK). That deal was originally announced in August of 2012, and its deadline has been extended to the end of this year while M&T resolves concerns that the Federal Reserve Board has raised about anti-laundering controls.

The M&T case came up several times during the conference. Still, banks have underestimated just how focused regulators are on compliance, said John Dugan, a former Comptroller of the Currency and currently a partner at the law firm Covington & Burling.

His suggestion was to be prepared for everything — including to show patience.

"Don't hardwire a date for closing," Dugan told the conference's estimated 750 attendees. "Regulators don't like that kind of pressure and will not hesitate to delay" approval of a bank deal.

Bob Browne and Dan Shumovich of the McGladrey consulting firm also tempered the conference mood with a sobering presentation about the plight of potential sellers, especially very small community banks grappling with succession issues.

Many aging CEOs are emotionally torn, Browne said. On the one hand, they have strong emotional ties to their banks and feel their communities are counting on their local banks. On the other hand, the reality is that many small banks are stagnant and there is no one to take control when they retire.

Essentially, Browne says, these banks need to do something, but the longer they wait the less they are going to be worth.

"It's incredibly sad," he said.