Rising costs and stiff competition have sparked a wave of mergers through the national banking industry, and as the activity ripples through Louisiana, it could substantially alter the landscape for small financial institutions around the state.
Forced to comply with expanding regulations in an environment where it was already difficult to make money, more bank owners are deciding to sell to larger institutions. Seven small Louisiana banks have completed or agreed to mergers so far in 2014 as compared with just one merger announcement last year.
“The merger pace is going to continue not only in Louisiana but throughout the Gulf South, especially among the smaller community banks,” New Orleans bank mergers specialist Jonathan Briggs said.
Increased regulatory demands and rising costs have been at the top of bankers’ complaints about their industry for decades, and over time, owners of small institutions realized they must grow in order to spread their costs across a larger base of operations.
But expanding their businesses has become harder in the past decade as a prolonged period of rock-bottom interest rates has reduced income from loans, and stiffer lending regulations have squelched borrower demand.
Banks that operate in communities with little competition and a stable customer base may be able to make money, even in the current environment. But Briggs, who heads the financial institutions group at Chaffe & Associates Inc., said that banks these days need total assets between $500 million and $1 billion in order squeeze out a profit.
Data compiled by the Federal Deposit Insurance Corp. show that more than 100 Louisiana-based banks held assets under $500 million as of June 30.
Gregory Feldmann, a banking adviser to Arizona-based CCG Catalyst Consulting Group LLC, believes the current challenges of running small banks raise questions about their future.
While industry critics rail against the theory that giant institutions like Bank of America and JPMorgan Chase are “too big to fail,” rising pressures on community banks point up the possibility that some banks are simply “too small to thrive,” he said.
Feldmann noted that some 30 years of consolidation have eliminated more than half of U.S. commercial banks, reducing their number to fewer than 7,000 and leaving just a handful controlling a large chunk of the industry’s total assets. But that reduction is “the tip of the iceberg,” he said.
Almost 2,000 institutions today are smaller than $100 million in assets, and continued consolidation is “likely to ensure that this large group of tiny entities will vanish from the scene,” Feldmann wrote in a recent blog post.
In an interview with The Advocate, Feldmann said little banks are particularly vulnerable to rising costs. Unlike big institutions that generate substantial income from fees, investments and nonbank activities such as insurance, small institutions are heavily dependent on the spread, or margin, between the yield they derive from loans and their costs for deposits.
“That net interest margin has been steadily eroding since the mid-1990s,” Feldmann said.
At the same time, costs for regulatory compliance, personnel and overhead have steadily increased. “It means you’ve got to be more efficient, and generally that means you have to have some scale and size in order to earn an acceptable return on assets,” he said.
Most of the smallest banks in Louisiana, as elsewhere, operate outside of urban centers, in rural areas where their owners live. Prospective buyers of these institutions likely will be banking companies headquartered in New Orleans, Baton Rouge, Lafayette and other cities, or companies based in neighboring states.
Louisiana’s largest bank, Lafayette-based IberiaBank, has grown rapidly to more than $15 billion in assets primarily by acquiring other institutions. And some of the state’s other large institutions, such as First NBC Bank in New Orleans and Business First Bank in Baton Rouge, also have shown an appetite for purchases.
But Feldmann predicted that community banks in a midsize range between $100 million and $500 million in assets also will go shopping. “I think getting to $500 million is important,” he said.
Veteran New Orleans banker Kyle Waters is among those looking closely at the prospects.
A former top executive with Hibernia National Bank, which merged into Capital One Corp. in 2005, and OmniBank, which sold to IberiaBank in 2011, Waters recently formed a consulting company focused on evaluating bank loan portfolios for owners who are thinking of selling their institutions and prospective buyers who need due diligence on their acquisition targets.
“I think community banks in Louisiana, as well as in Texas and around the Southeast, are going to be looking at mergers,” he said.
Waters thinks his firm, Loan Evaluation Services LLC, will find its clients primarily among banks of $1 billion or less in assets. The larger institutions in that group will be scouting smaller banks that can provide new sources of deposits and a good client base, “and we think some smaller banks, in the $200 million to $300 million range, will be looking to combine,” he said.
Much of the deal-making in the next few years will occur along the commercial areas lining Interstates 10 and 12 across south Louisiana, Waters predicted. “That’s where most commerce in Louisiana takes place, so you want a strategy that takes you along that corridor,” he said.
Waters said the relatively strong financial health of Louisiana banks and their clients creates a favorable environment for reaching deals.
Mergers specialist Briggs agrees. He said Chaffe & Associates has “quite a few deals in the works,” and he thinks small-bank owners who agree to be acquired will be rewarded.
While prices buyers have paid for recent acquisitions are down from highs seen in 2005-06, he said the pickup in merger activity is beginning to affect deals. Pricing on banks that are in good health is trending upward, Briggs said.