Pause in rate cuts will mean more M&A in 2020, says OceanFirst chief
Acquisitions are a way of life for Christopher Maher.
Maher, the chairman, president and CEO of OceanFirst Financial in Toms River, N.J., has announced seven bank deals since 2015. His $8.1 billion-asset company is set to buy Two River Bancorp in Tinton Falls, N.J., and Country Bank Holding in New York later this month.
Maher is ready for a relatively large acquisition if OceanFirst finds the ideal target.
While M&A activity was sporadic this year, he said potential sellers exist and opportunities abound. He noted that community banks are pressured on multiple fronts, including a need to invest in digital services and cybersecurity while facing fierce competition. And a pause to interest rate cuts should give buyers and sellers more visibility when negotiating a deal.
“All the drivers of M&A remain firmly in place,” Maher said.
OceanFirst is actively seeking to build out its Northeast operations, from Philadelphia to New York, while adding scale and capitalizing on its increasing size and reach to compete with megabanks such as Bank of America and JPMorgan Chase.
Maher recently discussed his 2020 expectations for M&A and operating conditions. This is an edited transcript of the conversation.
What’s your M&A appetite heading into 2020?
CHRISTOPHER MAHER: We want to find organizations that are similar in philosophy to ours — relationship commercial lenders with a strong group of consumer businesses. But pricing and structure are very important to assure we provide shareholder value over time.
If you have an overlapping geography, that’s ideal. If you have a contiguous geography, that’s OK. But it’s a harder stretch to go into a new market. In the case of our recent deal in New York, we had already made a commitment to expand there organically, so bolting on the acquisition to our organic expansion made sense. Similarly, we’re growing organically in Philadelphia. If we found something complementary in eastern Pennsylvania, that would be an opportunity.
What are you seeing in terms of seller interest?
These things ebb and flow. When you would think of maybe a year ago, when we were still in a decreasing rate cycle, that was punishing to a lot of liability-sensitive banks. So there were a lot of conversations going on. I think the rate cuts, particularly for liability-sensitive organizations, have provided a little bit of a breather, perhaps giving some of them an opportunity to improve performance. That said, there are still a number of banks looking for strategic partners — there’s a healthy amount of conversations going on.
Do you see the potential for a shift in M&A activity in 2020?
I think there’s the opportunity for more [activity] in 2020 for a couple reasons. First, the yield curve is stabilizing. When you have a stable curve, buyers and sellers have an increased ability to understand their value and appropriate sale metrics. That should help. Even the liability-sensitive organizations, which [are being] helped by lower rates, will have gotten whatever benefit by then, and I think they’ll turn their eyes to forging partnerships.
With a presidential election cycle, there tends to be more volatility in the markets. I think we have a broad range of potential outcomes with the election that could cause some further consolidation ahead of uncertainty in 2021. Among the political candidates are a range of views on regulation. If we start to see concern about a sharp change in the regulatory outlook, you might see people move to do transactions.
Is there a size of bank, in terms of assets, that you look for in a target?
You often find that you can create more value with a larger target because of the cost savings … but there may be small, alternative ideas that can still benefit our shareholders. We don’t like to set asset targets or limits, but we’re very comfortable doing larger scale acquisitions. … At the same time, if there’s a high-quality, in-market bank, it could be a good opportunity for us.
What about a merger of equals?
The market has been receptive, and the chatter about MOEs is definitely there. With any deal, you want to start with the fundaments. First, what are the business models of the companies you’re trying put together? It’s ideal if the business lines are highly aligned or, in some cases, where you have complementary business models. For example, one may be very strong in commercial and the other in consumer. … But the most important factor is whether the businesses have tangible value after the dust settles.
Almost any MOE is going to make good financial sense [when announced] because you’re going to take a tremendous amount of overlapping costs out. But the question is, beyond costs saves, do you have a high-quality business?
The second consideration is having clarity around governance [management and board]. That’s important because you won’t be able to deliver true shareholder value without quality execution. … The roles and responsibilities have to be painfully clear.
With an MOE, you’re doing a low- or no-premium deal, and you’re telling shareholders not to worry because you’re going to create value over time. You need to have the structures in place to make sure that value can be created.
What’s competition like right now?
In the commercial lending space, competition for highly qualified borrowers is pretty intense. You really have to be careful about loan structures — are you getting the right protections, the right covenants?
On the funding side, consumer deposit [gathering] is competitive because of the rate environment and the entry of new players and large national players like BofA that have become very good at [bringing in] digital consumer deposits. … You often hear about scale in terms of overall operations, but there’s also a lot to marketing scale, in particular, as well. That’s a big challenge.
What are your thoughts on the economy and the trade dispute with China?
We’re likely to have a slower rate of growth. But, at this point, the consumer seems strong enough that we’re not concerned about the near-term risk of a recession. As we get to the back end of 2020 and, depending on the election, you may see that change.
With international markets, it appears that the slowing in China, Germany and the U.K. has plateaued. If that holds where it is, I think growth could hold together in the U.S. We’ll know more about that when we get the trade situation settled.
How does that translate into organic growth?
I think we’re going to see solid growth next year — perhaps slower than this year — but still positive. That means we may not see a ton of net new demand for credit, but fortunately our markets are quite [heavily populated] so we see plenty of opportunity to take market share.
One thing that could make a big difference is new capital spending. It’s very hard to handicap how trade works out. If trade were to be resolved in a positive manner and become much more predictable, there’s a lot of capital on the sidelines that you could see driving stronger growth if it came back in. We have a number of clients who have projects they’re prepared to invest in, but they will not do it under the current trade situation. But if it were to clear, you might see much more capital spending, which could lead to stronger overall growth rates. That could make a significant difference.