Bank Director recently completed its 19th annual Acquired or Be Acquired (AOBA) conference in Scottsdale, Arizona, and I would describe the mood — not just about the bank mergers and acquisition market, but about banking in general — as generally upbeat. I think the dark clouds that have hung over the industry since 2008 have begun to part and the future looks a little brighter.
We drew a record crowd of 700-plus attendees to the fabled Phoenician resort (once owned, temporarily, by the Federal Deposit Insurance Corp. when the former publisher of Bank Director magazine, the late Bill Seidman, was the agency’s chairman) for four days of peer group discussions, general sessions and breakouts on a wide variety of topics relating to M&A, capital and strategy. Most of the attendees at this conference are bank chief executive officers and outside directors, so it’s almost impossible to spend a couple of days here and not come away with a strong sense of how the industry’s leadership feels about things.
(Unfortunately, the weather was not particularly cooperative during our stay. It rained the first couple of days — which is quite unusual for the Sonoran Desert this time of year — and in an effort to coax out the sun our managing director and executive vice president, Al Dominick, and I opened the conference by walking on stage with opened umbrellas. Our little voodoo trick was marginally successful — the sun finally appeared to stay on the final day of the event.)
If there was general consensus among the attendees about the future of the bank M&A market, it was this: We should see more deals this year than we saw in 2012 — when there were 230 acquisitions of healthy banks totaling $13.6 billion, according to SNL Financial. And one of the primary drivers will be the Federal Reserve’s ongoing monetary policy of keeping interest rates low, which has had the unhappy effect for most banks of squeezing their net interest margins. Remember, most banks make most of their money on the spread between their cost of funds and the interest rates they charge on loans. And even though deposits are dirt cheap at the moment, weak loan demand and intense competition for whatever good loans can be found have driven down loan pricing as well. Several speakers at this year’s conference predicted that the industry’s margin pressure — one might even call it a margin crisis—could last well into 2014.
A second driver could turn out to be the pending Basel III capital requirements, which in their current form apply equally to all sizes of institutions — and would force many community banks to raise capital. More than one speaker said that institutional investors are wary of putting their money into any bank that doesn’t have a compelling growth story to tell. Unless the U.S. regulators decide to apply a less stringent version of the requirements to small banks — let’s call it “Basel III Lite” — many such institutions could find themselves in the unenviable position of needing to raise capital from an unfriendly market. For them, selling out to a more strongly capitalized competitor might be their only option.
A third factor in the M&A market’s anticipated resurgence this year is the oppressive weight of banking regulation, including (but certainly not limited to) the Dodd-Frank Act. Smaller institutions will have a harder time affording the rising cost of compliance, and I’ve even heard some people suggest that banks will need to grow to $1 billion in assets before they begin to achieve what one might call “economies of compliance scale.” Although there are exceptions (including some provisions of Dodd-Frank), most regulations apply equally to all banks regardless of their size, which means it costs small banks disproportionately more as a percentage of revenue to comply than it does bigger banks with larger revenue bases. Will a large number of banks sell out solely because of the rising compliance burden? Probably not. But for an institution that is struggling with intense margin compression and needs to raise capital to meet yet another regulatory mandate, the higher cost of regulatory compliance could be the final straw.
Next year’s AOBA — set for Jan. 26 through Jan. 28 at the Arizona Biltmore resort in Scottsdale — will be the conference’s 20th anniversary and it will be interesting to see how well these predictions held up. Until then, ciao.