Some Contrarian Views on Bank M&A

The pace of mergers has to pick up next year because too many banks are in too much financial trouble.

Some bank executives expressed that view at FBR & Co.’s fall investor conference in New York this week.

"It's just a tough environment," says Glenn MacInnes, the chief financial officer of Webster Financial Corp. "Some of the smaller organizations will come to market during the next year."

Another speaker shared that glass-is-half-full view (from the standpoint of buyers, at least) of the toll low rates and high costs are taking on community banks. Their growing need to sell should ease a post-crisis merger drought that deepened in 2011, says J. Gregory Seibly, the president and chief executive of Sterling Financial Corp. in Spokane, Wash., which has $9 billion of assets.

"We think 2012 is probably a better year for M&A activity," he says.

They and other executives from small and midsize banks who spoke at the conference Tuesday were hardly bullish on bank deals. But they represent the small crowd of dealmakers and investors holding out hope that the dismally slow M&A market has bottomed out in the second half.

Sterling Financial struck its first acquisition agreement in years in November, though Seibly described its deal for most of the banking operations of First Independent Investment Group, in Vancouver, Wash., as a one-off opportunity.

The family that owns the $700 million-asset First Independent is aging and wants to cash out, Seibly says. The deal would pay $8 million up front and as much as $17 million more if First Independent's loans perform well.

Those kind of contingent payouts tend to only work in private takeovers. Inflexibility on pricing is a chief reason no public banks are in play in the Pacific Northwest, he says.

"We think people are talking more," Seibly says. But "for public companies in the Pacific Northwest spreads are wide" between what buyers are offering and what sellers want.

Seller expectations should fall next year, he says, as more institutions get "clear-eyed" that "their future does not contain a lot of profit."

MacInnes underscored why M&A is slow. The $18 billion-asset Webster, like a lot of other sizable banks on the mend, is reluctant to buy. The Waterbury, Conn., company's priorities are to cut expenses and attract new customers — thing that could improve its stock prices. Its ideal transaction is a friendly, reasonably-priced stock swap with a Northeastern bank that has several billion dollars of assets.

"We won't win a transaction where it's a bid — where it's a bidding war," MacInnes says. "We'd be quite [hard-pressed] to win an auction because we wouldn't pay up."

There were 114 bank and thrift acquisitions in the first nine months of 2011, about 12% fewer than over the same time period in 2010, according to data from the investment bank Sheshunoff & Co. and SNL Financial.

In another conference presentation, F.N.B. Corp. in Hermitage, Pa., made the case for why deals are good for business. Its agreement in June to buy the $1.8 billion-asset Parkvale Financial Corp. in Monroeville, Pa., extends its reach across east Pittsburgh, an important market where it lacks branches, F.N.B. CEO Steve Gurgovits says.

Taking share by opening new branches in that part of town would be costly and time-consuming, says Gurgovits, whose bank has $10 billion of assets.

"It was the last significant soldier standing — the next largest bank that you might expect might sell some day was about $700 million of assets," Gurgovits says. "But guess what? It's on the north side of town where we have a pretty good presence.