The Future Of Small Bank M&A

The following was originally published on Banking On Profit.

As we head into New Year’s weekend, I find myself reading a lot of year in review and next year outlook material. I am a big fan of the overviews and outlooks but try to avoid those prognosticators making specific predictions they insist are actionable right now for the low, low cost of your retirement accounts. I find that by reading a bunch of the overviews, I can begin to develop a picture of potential developments and obstacles an industry or market my face in the New Year. I won’t act on them today, but being aware of what might happen allows me to have a game plan ready if the events do unfold.

I probably spend more time on banking and real estate outlooks than anything else. Of course, I also believe that if you understand what is going on in the banking sector and real estate markets of a given city, town, nation, or continent, you know everything you need to know about the economy of that locale.

Deloitte released their 2017 Banking and Securities Outlook this month, and there are some key takeaways for us as investors. The company thinks that the election may have brightened the outlook for banks and securities firms, but challenges still exist. Banks will face significant technology challenges in 2017 and will probably have to spend some money to build and protect a new model of banking in a Fintech world.

For more analysis and insight into small bank stocks, check out Tim Melvin's Banking On Profit on Marketfy. 

Deloitte is confident and cautious in equal measure about the overall economy saying, “US gross domestic product (GDP) growth should be higher than in 2016, reflecting a tighter labor market. However, this almost-full employment is far from ideal; a serious skill divide exists alongside too many temporary and underemployed workers. The resulting low productivity growth could lead to a plateau as the year progresses.”

I have been saying this for some time, as the job creation I see outside the beltways and rivers is not of the kind we need to achieve higher growth rates. I still talk to a lot of people who are incredibly frustrated with their inability to find a meaningful and rewarding job. Perhaps now that a firm as renowned as Deloitte agrees with me, I will finally get the recognition as a brilliant economist that I clearly deserve!

The company also addressed one of my favorite topics, bank M&A. The report notes that “M&A activity may slow considerably until greater clarity about the coming regulatory landscape emerges, possibly prompting a fundamental rethink of business strategy. Even so, large national banks will likely continue strategic divestitures to hone their business footprint, shedding ancillary businesses that aren’t core to the portfolio of client services and don’t generate sufficient ROI. Large regional banks with assets in excess of $50 billion may continue making strategic acquisitions to better tackle regulatory compliance overhead. Smaller regional banks approaching $50 billion in assets will try to get comfortably above that mark to attain operational and compliance heft that systemically important financial institutions require. However, most M&A activity will take place among banks with assets between $1 billion and $10 billion. Since we primarily live in the under $10 billion world we are okay with this."

I spoke with Chris Marinac of FIG Partners, who also had some comments on M&A in community banks. When I asked him if M&A was coming to an end or was still a secular trend, he told me, “I think it's definitely a secular trend. I think M&A is here to stay. I think if anything, M&A accelerates because of higher prices. Currencies really drive M&A. What happens over time is that stock prices tend to have wider dispersion regarding their evaluations. That is beginning to develop, and I think it will continue to occur as 2017 unfolds, and what that means is that there's a bigger spread on the price-to-tangible-book, and as that happens, the buyers distinguish themselves from the sellers, and more transactions can happen.

Write this down. If we did a remake of Mrs. Robinson today, Mr. McGuire’s one word would be “Cyber.” All the great new things that technologists and pundits see happening are heavily reliant on cybersecurity. FinTech, EdTech, robotics, driverless cars, virtual reality, the list goes on and on, and every single one of them is hackable and will require a constant and expensive vigilance on cyber security. Be patient, buy at a good price, but be aware of what is going on in the sector and who is doing it.