Regional Banks Are Well Positioned, Especially For M&A
The following weekly newsletter was originally published on The Community Bank Investor.
All you need to know about the markets is contained in the private equity earnings calls I have been covering for Real Money this week. Bill Conway the Co-CEO of Carlyle Group put it this way: “You have to evolve in our business. We're not changing a risk that we're willing to take. But in the current environment -- which, who knows how long it will last--maybe there's a time to sew and a time to reap. And right now is a pretty good time to reap, frankly.”
KKR CFO Bill Janetschek put it this way telling investors, “We like liquidity in this type of environment. To the extent that there's going to be dislocations, we want to have the ability to have that cash and take on those types of opportunities. Keep in mind cash is probably one of the best hedges you could possibly have."
Scott Nuttall KKR's Global Capital and Asset Management Group added "With patient capital and the added benefit of $38 billion of record dry powder, we feel well positioned to take advantage of opportunities that arise from this dislocation. In effect, when you have locked-up capital and a lot of dry powder to deploy, it's great news when assets get cheaper."
That’s what I see right now as well. There just not a lot of places to put cash to work. Community banks, a few special situation real estate related securities. Beyond that, holding cash makes a lot of sense. It is not time to be flooding the market with our earned cash. I can promise you if Hetty Green was alive today she would be holed up collecting rents and avoiding tax payers. She would not be anywhere near Wall Street. Mr. Womack is off taking care of his pigs and waiting to hear that euphoria has risen to levels where he should consider driving to town and sell all those stocks he bought back in 2009.
The big news in community banking this week is that the KPMG 2016 Community and Regional Bank Outlook is out. This year's report, titled “A Matter of Momentum”, finds that regional and community banks are well positioned to grow and learn from the past. The focus for regional and community banks in 2016 should be on kick-starting growth, improving management of regulatory risk, deciding whether they are going to be buyers or sellers in a fluid M&A market, and enabling the “branch of the future".
Author John Depman is KPMG's leader of regional and community banking and has 25 years of experience with banking industry. He found in this year's survey that “Only eight percent of survey respondents believe a bank smaller than $1 billion in assets can survive." That size may vary depending on geography, but almost 5,400 of today’s banks fall below that asset size. In fact, there are still about 1,700 banks below $100 million in assets.
Far fewer executives this year said they would be “very likely’’ to buy through mergers and acquisitions compared to last year, with more saying they'd be "somewhat likely". Compliance costs remain a problem according to the survey. The report summary noted that “The continuing drain on banks from regulatory costs could be a reason for increased involvement in M&A." A full 47 percent of those executives polled said their regulatory costs represent between 11 and 20 percent of their total operating costs – up from 33 percent last year. "The need to absorb these costs over a larger asset base seems to be a driving factor in the interest in M&A that we have seen," said Depman.
David Seleski, CEO of Florida based Stonegate Bank (NASDAQ: SGBCK) talked about Florida M&A on his recent call. He told investors "We are actively looking, and I'm still extremely confident that we're going to get something done before the end of the year, at least announced. We really have kind of fine-tuned how we're looking at acquisitions. We're really only looking for in-market deals where we are currently. We think that real value Stonegate is adding market share in individual markets were in, such as, right now we're number one or will be number one in the closed region in the Broward County. We would like to be number one or number two in some of the other markets that we're in as well, and we think that makes us a very attractive franchise. We're also seeing that those economies of scale, and just having that much larger of a sales force in a particular county in a geographic area, creates more opportunities for us. And we're simply seeing that's where the growth is and that's where we're getting better margins. It just makes more sense for us. So while we'd love to be in Orlando and Jacksonville, I think the only way we'll enter those markets at this point is if we were to hire a de novo team and bring them over and then build that up to some extent down the road and then maybe capitalize on a merger down the road along those lines. But for right now we're primarily focused in-market and we feel fairly confident we're going to get something done.”
I made the "Just Buy Them All" call in Florida back in 2014, and to say it has worked out pretty well for us would be a massive understatement. There have been 22 bank deals in Florida since I made that call, and we have participated as either a buyer or seller in most of those involving a publicly traded bank. Florida M&A has covered a lot of mistakes and paid for a lot of bad habits in the past two years. The opportunity is still there, as there are still several banks on the hunt here and plenty of smaller banks considering a sale.
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