Go big or go home is no longer the mantra for crossing $10 billion in assets.
Bankers and industry experts once held fast to a belief that institutions had to leap over that threshold to generate enough scale to offset the toll of regulation, including caps on interchange fees and mandatory stress testing, waiting on the other side. Several banks even elected to sell before crossing the mark.
A number of banks have been bucking the trend in recent months, announcing deals that could have them tiptoe over the mark, including South State in Columbia, S.C.; WesBanco in Wheeling, W.Va.; Pinnacle Financial in Nashville, Tenn.; and United Community Banks in Blairsville, Ga. WesBanco, for its part, has said it plans to manage its assets to stay below $10 billion.
Several reasons exist for the shift, industry observers said. Bankers are becoming more comfortable with the costs of new regulation. At the same time, consolidation is unpredictable, and many executives are reluctant to pass on a small, but strategically important, deal in order to wait on a bigger opportunity.
"I feel like the marketplace has incorrectly assumed that banks need to be 20% or 30% larger to cross $10 billion of assets," said Christopher Marinac, an analyst at FIG Partners. "You have to run your business and make the right long-term business decisions."
The $8.7 billion-asset South State was once an active acquirer, more than doubling in size between late 2011 to early 2013 with three deals. Management decided to take a break after buying the $3.2 billion-asset First Financial Holdings to make sure South State's fundamentals were sound, said Robert Hill Jr., the company's chief executive.
South State, which was prepared to grow organically, had been cutting costs to offset expenses associated with stress testing and the roughly $7.6 million in lost revenue from an impending cap on interchange revenue.
South State, however, couldn't pass up a chance to buy the $1.9 billion-asset Southeastern Bank Financial in Augusta, Ga. The holding company for Georgia Bank & Trust is a good cultural fit that should offset any hits South State will take from becoming a bigger institution, industry observers said.
"This just seemed to be an ideal partner" for South State, said Lee Burrows, chief executive of Banks Street Partners. "You wouldn't want to pass that up because you are trickling over $10 billion of assets. This still gives them time to prepare, so I think it is inevitable."
Banks that cross $10 billion in assets have time to prepare, since interchange caps do not kick in immediately. South State, for instance, will not feel the impact of those caps until the third quarter of 2018, or roughly a year earlier than if it had grown organically.
The $335 million all-stock deal is small enough that it doesn't "take any of the options off the table for us," Hill said. While South State favors organic growth, he said the company could buy a second bank before taking another pause to focus on organically expanding core operations.
Such an approach should be appealing to investors and regulators, industry experts said.
"If you're really honest about it, investors should want to see organic growth," Marinac said. "There are moments when the market likes the roll-up strategy, but really, internal sustainable growth is what the market focuses on long term."
The banking industry has had ample opportunity to study and adapt to new regulation, removing the urgency to pursue large, transformational deals.
"There's been enough time to understand the hurdle and how you cross it," Hill said. "People have the ability to figure out the right strategy for them. Our first [objective] was to figure out how to do it organically, then cut expenses … and finally find a good partner to accelerate that process."
As banks reach $8 billion of assets, regulators start asking management for details on how they plan to cross the regulatory mark, said Randy Dennis, president of DD&F Consulting. As a result, bankers start building infrastructure for the new requirements well before making the jump.
"Banks have to get ready for it," Dennis said. "Regulators aren't being heavy handed about it; they're just trying to help banks prepare in an orderly fashion."
Bankers are also limited by the flow of industry consolidation. At May 31, the number of deals announced this year was off 16% from 2015. There are a limited number of banks with $2 billion to $5 billion of assets that could allow a buyer to vault itself over the regulatory threshold.
Strategy, rather than asset size, should be a driving factor as banks look to expand, said Daniel Blanton, Southeastern's chief executive and chairman of the American Bankers Association. South State was drawn to Southeastern's Augusta operations because the city had become "a major university town" with a growing military presence, he said.
"I think a smart company is driven by the business model they want to do and the markets they want to be in," Blanton added. "What happens with assets just happens."