The wave of bank buyouts may not break for several years, one industry consultant says, as the sector settles from stringent federal financial reform and responds to a steady graying of its executives.
Now a decade after the 2008 financial crisis, post-recession financial reform continues to evolve the banking industry, and in the southwest Missouri region, the changes are apparent in the form of increasing bank mergers and acquisitions.
“It is a nationwide phenomena,” said Max Cook, president and CEO of the Jefferson City-based Missouri Bankers Association. “It’s not just Missouri, or Springfield, and it’s being driven by a number of factors.”
Smaller banking institutions are especially hard hit, he said.
“In the end, the bigger the base of assets you have, the further you can spread those costs and be more efficient,” Cook added. “And with the last 10 years – post-meltdown, post-Dodd-Frank – the compliance cost on these banks has been outrageous.”
Recent acquisitions include Guaranty Federal Bancshares Inc.’s (Nasdaq: GFED) $4.6 million purchase of Carthage-based Hometown Bancshares Inc. and its handful of Hometown Bank branches, growing total assets for Guaranty Bank to nearly $1 billion.
Also in April, Arvest Bank closed its $391 million purchase of Bear State Financial Inc. (Nasdaq: BSF), the holding company of Bear State Bank. Through the deal, Arvest increased its assets to $18.8 billion.
A buyout in the works is Moline, Illinois-based QCR Holdings Inc.’s $86.7 million cash-and-stock deal for Springfield First Community Bank.
Little Rock, Arkansas-based industry consultant Randy Dennis – who assisted Arvest in acquiring Bear State, among hundreds of other deals – said the uptick in buyouts is set to last. Aside from mounting regulatory compliance, he said, bank executives continue to age and retire from positions largely left unfilled.
“If you look across the country, you have old management teams in old rural markets that have old boards of directors that have old stockholders. Missouri’s got tons of that,” Dennis said. “You ask regulators what keeps them up at night; it’s succession.”
Beyond aging executives, increased costs from regulatory compliance during the past decade have nonetheless delivered a sound blow to the banking industry.
The blames lies with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
“We’ve seen smaller banks either merge with other smaller banks or go out of business entirely, selling to larger banks,” Crain said.
Dodd-Frank comprises some 2,300 pages worth of legal reform. It’s hard to pin down any one measure suffocating the banks, but in short, the mass of law has imposed stout implementation costs as a whole.
Nationally, Dodd-Frank cost the economy some $36 billion, requiring nearly 40,000 full-time annual employees to complete just a single year’s worth of related paperwork, according to a 2016 analysis from conservative think tank American Action Forum.
Dennis said banks with assets less than $500 million – or roughly three out of every four banks among the 5,900 institutions nationwide – were particularly hard hit by the reform.
“And it’s really tough on banks under $100 million,” he said.
The nation’s largest roughly 100 banks have gained a competitive advantage, according to industry sources.
Take Arvest, for example, a company with $18 billion in total assets that recently completed five acquisitions in as many years, Crain said.
Such institutions already maintain significant compliance infrastructure, such as additional personnel, software and other technology.
Once banks reach a $10 billion asset threshold, they’re held to higher regulatory standards, ultimately positioning them to acquire smaller banks.
“When we crossed the $10 billion threshold as a bank, there were certain things that, regulatorywise, we had to put in place,” Crain said, adding now, “we can grow even larger.”
Certain “loan-rich” institutions, such as Guaranty Bank, meanwhile, need money to loan but are falling short on actual deposits, Dennis said.
“So if you get a bank in a rural market,” he said, “they have a lot of deposits, and they’re desirable acquisition targets for somebody who has a lot of loan volume.”
The last charter
In Missouri’s vibrant banking industry, Dennis said the trend is to acquire, not charter.
The last bank to charter in the state is the Queen City’s own Springfield Bancshares Inc. Springfield First Community Bank was established de novo in 2008.
Currently with about $560 million in assets, the bank now has penned the merger deal, a process that likely will span months.
Robert Fulp, SFC’s chairman and CEO, said talk of the transaction started between both parties during an industry conference.
“Truly what happened, it was just the holding companies merging,” Fulp said.
He said SFC Bank – which will retain its charter, brand, personnel and local controls –will bolster its consumer and commercial banking. Net operating income for SFC Bank was roughly $7.6 million in 2017, up 10 percent from $6.87 million the year prior.
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