Talking bank M&A is like a bunch of old friends talking politics or sports: The questions rarely change, the debate never ends, but the conversation is irresistible.

How many deals are going to happen this year? Should banks sell? Which ones? And, are mergers really worth it?

Four experts who have gnawed on such questions for years — Tom Michaud, president and CEO of Keefe, Bruyette & Woods; Grant Gregory, a managing director at Morgan Stanley; Carl Cheney, former co-CEO of Hancock Holding in Gulfport, Miss.; and Paul Murphy, CEO at Cadence Bancorp. in Houston — hashed them out at the annual University of Mississippi Banking and Finance Symposium last week.

A lot about bank M&A in the post-crisis era remains unchanged, but the symposium panelists said there is a big X Factor: possible changes to the $50 billion-asset threshold for systemically important financial institutions.

Number of bank M&A deaels from 2012-2017ytd

First, let's start with the state of the market.

Nearly 190 bank deals have been announced this year through Oct. 19. At that pace the 2017 total will fall just shy of the prior year's activity.

The biggest drivers of deals include a rise in technology-driven competition, regulatory costs and executive-succession concerns. Smaller buyers have dominated the market this year.

Since the November election, 97% of all bank mergers have involved buyers with less than $25 billion in assets, Michaud said. Recent M&A activity has created a tier of “regional champions” such as South State in Columbia, S.C.; Renasant in Tupelo, Miss.; and Pinnacle Financial in Nashville, he said.

Most banks with $25 billion to $45 billion in assets have steered clear of acquisitions for fear that regulators concerned about "too big too fail" and economic concentration issues would reject them. New York Community Bancorp walked away from its agreement to buy Astoria Financial after it was unable to get regulatory approval.

However, larger acquirers could emerge if Congress raises or redefines the SIFI threshold, the panelists said.

“You could see a cascade of deals with bigger buyers if the SIFI threshold changes,” Michaud said.

“You don’t have to be bigger to be better. But you do have to do better to get bigger.”

Panelists also debated whether smaller banks can remain independent in an environment of heightened regulatory burden and interest rates that, while rising, remain historically low.

There is an established view that profitability is closely linked to asset size, Michaud said. There are scale advantages, and smaller institutions often lack loan diversity and rely on concentrations in areas such as commercial real estate, he said.

Size is not the only reason why banks succeed, Gregory said. Institutions with $500 million in assets can still produce value for shareholders by improving how they do things and finding reliable fee-income streams. Rising rates could also help over time.

“You don’t have to be bigger to be better,” Gregory said. “But you do have to do better to get bigger.”

That being said, more banks are talking about merging, panelists said. One area that is gaining more traction involves potential mergers of equals.

“MOE talk is up as CEOs think they can make it socially successful and cut costs,” Michaud said, adding that banks are targeting a 1% return on assets as a “clear key to success.”

Mergers are easier said than done, said Cheney, the panel’s moderator. “It is harder to do a merger and make it work,” he added.

“While M&A makes a lot of sense, it has to be thoughtful and work with the other partner,” Murphy said.

Panelists also gave advice to privately held banks looking to become buyers or sellers. For instance, aspiring acquirers would benefit from having stock to offer a target.

“Banks need a currency to do deals,” Michaud said. “Cash can’t compete with a bank that can offer stock trading at 2.5x tangible book.”

Those looking to sell need to be realistic about their valuations, Gregory said.

Murphy, who has acquired 11 banks over his career, had his own take. “Call me before reaching out to your investment bank,” he said with a chuckle.

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