Bank And Thrift Mergers To Continue

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Nov 07, 2014

More bank and thrift mergers are inevitable despite a recent slowdown in the trend. Competition is the driving force. Since the unusually severe 2007-2009 recession –Â centered in the financial sector –Â deal making has become tougher as regulators have raised the bar for companies looking to merge. Regulators, including the FDIC, the Federal Reserve Board and the comptroller of the currency, are using their leverage to push banks and thrifts to boost their compliance programs. Often, the goal is to take an especially close look at the anti-money laundering capabilities of financial institutions aiming to merge.

There have been a few instances where deals have been put on hold, or even canceled, because of the stricter regulatory guidelines. Northwest Bancshares (NWBI), a Pennsylvania thrift, had to back off its planned acquisition of Nextier Bank because its consumer finance segment was deemed not up to par. Nextier negotiated another deal while Northwest was in the penalty box. Northwest Bancshares is now looking for another merger partner.

More recently, Mississippi-based BancorpSouth (BXS) withdrew its applications for a pair of acquisitions after raising red flags for its compliance with the Bank Secrecy Act (BSA). BancorpSouth still hopes to conclude its proposed transactions to buy Louisiana-based Ouachita Bancshares and Texas-based Central Community Corp. But the company must first hire a BSA officer, assess its personnel requirements in the BSA department, and create a training program related to BSA compliance, all of which will take time and money.

The biggest deal in limbo is M&T Bank’s (MTB) planned takeover of Hudson City Bancorp (HCBK). M&T is following the tried-and-true merger game plan by attempting to pick up an institution in a nearby geographic area (M&T is based in Buffalo, New York while Hudson City’s home is northern New Jersey). It makes good sense to bring on board a company having $20 billion in deposits that is in a region with high per-capita income. But the merger has been held up for more than two years now because of anti-money laundering compliance issues. The current deadline for completion is December 31. M&T Bancorp has spent heavily to upgrade its systems to clear the way for this deal and any other moves it might make in the future. Regulatory approval of the merger would be a good sign for the industry, and help delineate what exactly is needed to obtain official confirmation.

Over time, the urge to merge is likely to be too strong to resist, given the difficulties of producing meaningful loan and deposit growth. Given the large number of banks and thrifts out there, price competition is rife, setting the stage for future business combinations once companies run out of options to push profits higher. The threat of higher interest rates in 2015 also has companies looking to shore up their funding bases, in the event depositors move their cash into higher-yielding accounts. CIT Group’s (CIT) pending acquisition of OneWest Bank appears to have been motivated by the desire to beef up deposits.

Although heightened regulatory scrutiny has left a number of the big banks less interested in pursuing mergers, that is not the case at North Carolina-based BB&T (BBT), which last month offered to buy Bank of Kentucky for $363 million. If approved, this would be a relatively small move for BB&T, although one that would put it into the attractive Cincinnati, Ohio market. Overall, the deal can be viewed as a trial balloon for BB&T to see if investments to upgrade its systems and processes are sufficient to allow its bid to buy Bank of Kentucky to pass regulatory muster.

Another positive to making mergers and acquisitions is the potential for a higher stock price if the deal adds to earnings in relatively short order, usually considered less than one year. In view of increased regulatory burdens, blockbuster bank mergers may temporarily be on hold. But investors looking to capitalize on consolidation in the banking and thrift industries can still look at institutions in the $1 billion to $15 billion-in-assets range operating in stable markets for merger and acquisition candidates. One hint: A company with a CEO at or near retirement age is often more inclined to be acquired.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.

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