Smaller buyers expected to drive bank M&A in 2020

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Expect smaller bank mergers to be the norm in 2020.

Historically, banks with $2 billion to $7 billion in assets were the catalysts for M&A, industry experts said. But many of those banks were sold or grew aggressively to cut expenses and offset the added regulatory costs of crossing $10 billion in assets.

That is putting more pressure on smaller banks that once counted on be sold to bigger institutions to instead become acquirers.

A lack of larger community banks “creates a unique wrinkle in the ongoing consolidation theme,” Chris Marinac, an analyst at Janney Montgomery Scott, wrote in a recent client note. That “likely entails smaller community banks … creating their own M&A activity to position themselves for further growth.”

It would be notable shift.

Banks with assets below $2 billion accounted for 93% of the sellers in M&A deals announced this year, according to data from S&P Global Market Intelligence.

The forces that drove many of those banks to be sold could spur others to become acquirers, industry observers said.

“The smallest banks go into 2020 with all the same pressures — competition from bigger guys, needs to invest in tech, succession issues,” said Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets in Texas. “With the overall need for scale, I think you’ll continue to hear more conversations among these banks.”

Other pressures have been building in recent months, including a deceleration in loan growth, lower yields after several rate cuts and an increase in nonbank competition. M&A could provide smaller banks with an opportunity to cut more costs and improve efficiency.

“We believe that the landscape remains ripe for consolidation as profitability has likely peaked and EPS growth has slowed,” the research team at Keefe, Bruyette & Woods wrote in a client note.

There have already been several instances of deals with smaller banks as buyers.

Several of those have occurred in Texas, where there are dozens of smaller community banks.

Wichita Falls Bancshares said this week it had agreed to buy the $181 million-asset Chico Bancorp. It will be the first bank acquisition for the $482 million-asset Wichita Falls, which was formed in 1986.

The $950 million-asset BancAffiliated in Arlington agreed this month to buy the $450 million-asset Odessa SouthWest Bancshares in Odessa. The acquisition would broaden BancAffiliated’s reach, boost its scale and help it compete with bigger banks.

“Together we will not only expand our footprint in Texas and our lending capacity but also provide enhanced technology, products and services to better serve our valued customers,” BancAffiliated President and CEO Garry Graham said in a press release.

Leaders at bigger banks typically stay away from smaller deals because they tend to be time-consuming and they do not add much scale or profitability. Others are simply taking their time after completing multiple acquisitions.

First Commonwealth is among the banks choosing to be highly selective after buying three banks, and adding 27 branches in two other deals, since 2015. Those acquisitions have pushed the Indiana, Pa., company past $8 billion in assets.

“We pass on a lot of opportunities,” First Commonwealth CEO Mike Price said in a recent interview.

The good news for small banks is that stock prices climbed in 2019, better positioning would-be buyers to pay the prices needed to attract sellers and get deals done.

“No question, bigger is better,” said Robert Bolton, a former banker and president of Iron Bay Capital. “In this environment, the smaller banks are, more and more, looking around at peers and asking which ones would make a good complement, a good partner to gain scale.”

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