Who would want to buy a bank these days? The margins are awful, the regulatory cost and hassle of operating keep rising, Ben Bernanke seems determined to drive interest rates (and revenue received on loans) to zero, not that people show much inclination to borrow anyway, and everyone blames you for triggering the recession, even if you were nowhere near the scene of the crime.
Someone must want to, though, because we’ve seen a spate of deals in Washington recently, involving some prominent local players.
The mergers-and-acquisitions market didn’t dry up during the recession, but most of the deals were of the “will you take this zombie bank off our hands?” variety in which FDIC and other regulators tried to clean up the wreckage of failed financial institutions (and in some cases had to pay acquirers to haul the carcasses away). Many banks didn’t have the capital to spare to make deals. Others did, but when healthy institutions could pick up loans, deposits and branches at better-than-bargain-bin prices, there wasn’t much incentive to do a market-price deal.
It’s a different environment today than it was during the recession, and different from the pre-recession era, as the nature of the recent deals attest.
Columbia Banking System of Tacoma just concluded its acquisition of West Coast Bancorp, a Lake Oswego, Ore.-based bank with 58 branches. The new Columbia will have $7 billion in assets and 157 branches in Washington and Oregon.
Meanwhile, Heritage Financial Corp. of Olympia plans to buy the parent of Puyallup’s Valley Bank. Once the deal is completed, Heritage will have $1.6 billion in assets and more than 40 branches.
The third deal of note is the combination of two Bellevue-based single-office banks, Core Business Bank and Puget Sound Bank (no, not the long-gone Tacoma institution but a recent start-up). The combined banks will have $330 million in assets.
So what’s going on here?
For starters, the shelves of distressed banks available for purchase have largely been cleared out (with one recent local exception, the failure of Westside Commercial Bank and its sale in January). If a bank wants to grow by acquisition, the pool of candidates is now made up mostly of profitable banks.
And, hyperbole in the lead paragraph aside, banks do want to grow and they see opportunities to do so, particularly in business lending. That segment of the market wasn’t immune to the recession, but it did not suffer nearly as badly as housing development. Puget Sound Bank, started in 2005, says its nonperforming loans represent less than 1 percent of the portfolio, while Core Business – which opened in 2008, a terrific year to start a bank – doesn’t have any nonperformers on its books. For all the uncertainties still looming over the economy, businesses are borrowing again to replace or add equipment and expand. Banks want that business.
Growth isn’t the only motivator for deals. Banks are also looking to cut costs, or at least be more efficient with every dollar they’re spending. Technology, employee costs and regulatory expense, to name just three, are demanding more money all the time. Consolidation can help stem the increases and improve efficiency, whether by trimming the number of employees or closing branches with overlapping service territories. Columbia said it expected to reduce West Coast’s operating expenses by 25 percent.
That probably figures into the thinking of institutions such as Core and Puget Sound, which came at the tail end of a two-decade wave of bank formations in this state. Those startups still around may figure they could use a bit more size to keep the model working.
Banks also want to stake out operating territories and market share. Columbia says the addition of West Coast will make it first in the combined states of Washington and Oregon for deposit share. Increased market share and presence mean more revenue-generating customers and greater clout for marketing efforts to attract still more customers.
What Columbia and Heritage and others like Banner are doing are recreating the midsize, midmarket, regional institutions that fit between the small startups like Core and Puget Sound and the very large multistate banks – Chase, Wells, U.S. and Key.
Those midmarket, midsized institutions disappeared because they themselves made good acquisition targets for the majors. But that was a different era. The majors haven’t made many deals of late (Chase’s purchase of the remnants of Washington Mutual was largely a market extension, not a filling in of territory in which it already operated). To the extent they’re growing they’re doing so by opening their own branches rather than acquiring smaller institutions. That may remove some takeover premium from bank stock prices, but it also gives Columbia and the like some competitive room to operate.
Yet another era in banking could be coming soon. The economy could sour, or it could take off roaring – either scenario will affect the M&A scene. The majors could get smaller, shedding businesses they don’t want, or they could decide that smaller deals are worth their time after all.
The midsized players might decide to combine with each other, or move beyond their existing markets, or give up buying altogether. The safest bit of advice is that no one – executives, customers, employees, stockholders – should get too comfortable with the banking scene as is.