Pub. 5 2014 Issue 1

www.wvbankers.org 10 West Virginia Banker M any financial professionals and American Banker have opined that bank merger activity, especial- ly among community banks, is due to increase rapidly. An article by Andy Peters in American Banker on January 27, 2014 predicts that the recently announced merg- er of Yadkin Financial and VantageSouth Bancshares represents a tipping point for bank consolidation in North Carolina, and perhaps elsewhere. Of course many thought that activity would take off in 2013, and it did not, with a few excep- tions. There were many reasons for slow consol- idation activity, but the largest three were uncertainty about bank loan portfolios, low relative pricing for bank acquisitions, and an uncertain economy. Bank loan portfolios and lending procedures seem to be strengthening, particularly among troubled banks. More and more banks are finding relief from special regulatory status. Most banks have written off the loans that have substantial risk. Accord- ingly, more potential buyers are a bit less concerned with “unexpected conse- quences.” And yet, many banks that have “turned the corner” still hope for a buyer, either because they have been damaged in the market, capital is still low and difficult to attract, or management is worn out. Stock prices are recovering – more so for banks with a clean bill of health – but they are slowly recovering. Most financial professionals doubt that banks will ever again see the extraordinary price multiples that they saw in the late 1990s through the mid-2000s. Bankers tend to have more realistic expectations of the bank’s worth. The economy, well, it seems to be the economy. Until the government can find that sweet-spot between regulating true risk and over-regulating the community banks that support economic growth, we may remain in a “mild recovery” (read that, “non-recovery recovery”). Add the uncertainty from additional regulation in other sectors, the Affordable Care Act, an increasing deficit, substantial turbulence in the international affairs and markets, etc., and the recipe is not yet in place for confident, private economic expansion. In other words, it probably will not get a lot better anytime soon, so we might as well adjust to a slow pace of growth. West Virginia banks, to a large extent, escaped the “Great Recession” in pretty good shape. There were no bank failures in West Virginia. Most banks apparently have enough capital. “Stable” may be the best description. Reasons for this abound, but it means that West Virginia community banks, as a group, are not “looking” for a buyer or a merger partner as much as banks in many other neighboring states. But despite the general economy, many West Virginia banks are just across the border from neighbor markets that may grow rapidly. Industry in Ohio, shale gas in Pennsylvania, technology development in North Carolina, and federal govern- ment hiring and contracting in Maryland and Virginia all present opportunities for expansion. Also, excess capital (if there is such a thing anymore) is its own attraction. West Virginia banks may be in a special position, either as an attractive acquisition or as a possible buyer into a faster-growing market. If your bank is thinking about that, good for you! However, keep in mind that the process has risks that are often overlooked. Everyone knows that you want to buy low and sell high. Or in a bank merger, maximize your value in relation to your chosen partner. Everyone also knows that the process is costly. There are three risks I will discuss today that you may not have considered. The first is timing. In the “good old days,” a bank merger typically took 6-8 months, start to finish. Mergers today are subject to more careful review by higher-level regulators. Approval generally must come from Washington, D.C., not your federal regulator’s regional office. Thus the process is slower, more expen- sive, and more risky. The recent proposed merger between CMS Bancorp in White Plains, N.Y. and Customers Bancorp in Wyomissing, PA. was terminated due, in part, to delays. Many other mergers took much longer to complete than expected, including United Bancshares merger with Virginia Commerce Bancorp. Why does that matter? It matters, because expected delays affect the price a buyer is willing to pay. Call it the “regulatory risk discount.” This is not money in the buyer’s pocket; it is a real assessment of the cost of the Is It Going to Be a Bumpy Ride? Margo Channing (Bette Davis) in “All About Eve” famously said, “Fasten your seatbelts, it’s going to be a bumpy night!” Does that sum up the status of future community bank merger activity? Maybe so. By Hugh Wellons