Whether it's, smaller banks trying to merge to get to a billion of assets, slightly larger ones trying to get to 5, folks trying to figure out how to cross the 10 billion mark, where you come into interchange fee caps and CFPB oversight , I think that's kind of where things are certainly succession , is something to keep in mind, not only management succession, but also with board of boards of directors as well.
From the American Bankers Association, this is the ABA Banking Journal podcast. Welcome back. I'm Evan Sparks, and I'm delighted to have a return guest with us today. Paul Davis is a contributing editor here at the ABA Banking Journal, and he's also the. Founding editor and proprietor over at the bank slate at the bank slate dot com. And I encourage you to go check that out.
It's a great, great resource on all things bank management technology and put one of Paul's special specialties bank mergers and acquisitions as the as a portfolio. Former reporter for American banker where he became regarded, I think, as one of the nation's authorities on what's going on in the bank merger and acquisition market.
And so Paul, I'm really glad to have you on today to talk a little bit about that and help us understand where things are in here in the middle of 2024 in the community bank M and a space.
Yeah, thanks, Evan. And it's, it's kind of hard to believe that we are here at the midpoint of 2024 already.
Yeah, it is that it is it's something else. So so we, yeah, we are, we're here, here in 2024. I'd love it if you could just kind of give, give us a little sense on where things are trend wise. What are you seeing in the in the M and a space for for community banks right now?
Yeah, so I, you know, there are several things that I think are going on right now. I think, you know, we're starting to see a little bit more activity. However. You know, those are typically going to be deals where they're, I think, a little bit larger in size and really you know, check off a lot of longer term boxes for the acquirers. You know, I think of some of the deals that have been announced recently and and Heartland.
You know, First Sun and Home Street, you know, those are rather larger than your typical community bank mergers. So you know, in terms of overall activity, I think people are still trying to figure out the math in a lot of ways. You know, at 1 point, I think it was the. You know, the securities books that people were trying to get their heads around.
Now, I think, you know, people are also just trying to get a sense of loan portfolios, you know if you notice, I mean, we've seen recently, you know, several banks and we can talk about this later, you know, are raising capital to address CRE concentrations. So I think, you know, we'll see a period to where I think folks are going to try to get a better handle on that.
Once you kind of get that squared away and knock on wood, no, you know, unexpected plot twists, you know, maybe we will see a little bit more acceleration and consolidation activity, you know, maybe closer to the end of the year.
So, if so, you know, 1 of the things we, we hear, I've heard a lot of, but we've seen a lot in the spaces. You know, there are some big drivers include succession increased costs needing to spread spread those costs over a larger asset base. And then regulatory hitting these regular these, you know, sometimes fairly arbitrary regulatory thresholds and needing to either. Sell before you hit it or make a big jump after we jumped over it. What, what's the breakdown that you're seeing right now?
What, what, what seems to be the principal driver of the transactions we're seeing in 2024?
Yeah, I mean, you know, number one, you know, it's, it goes with, you know, it's worth saying, you know, the, the drivers of M& A. From years past are still primarily the drivers of M& A today. Everything that you mentioned, right? You know, I think driving cost efficient, you know, finding cost savings to pay for things like technology upgrades and things like that is certainly front of mind for a lot of folks certainly getting to a certain amount of scale.
Whether it's, you know smaller banks trying to merge to get to a billion of assets, slightly larger ones trying to get to 5, folks trying to figure out how to cross the 10 billion mark, you know, where, you know, you come into interchange fee caps and CFPB oversight.
I mean, those things are, you know, in the, in those order, I think that's kind of where things are certainly succession is a, is a, is something to keep in mind to not only, you know, management succession, but also with board of boards of directors as well. But, you know, it goes, you know, just, it's just 1 of those things that the same, the same types of things that have driven deal making in the past are certainly they haven't gone away. In fact, a lot of those have been simply intensified.
You know, what, with you know, do you, do you, are you expecting, you know, kind of Where are you expecting to see additional deal? Where should we expect to see additional deals crop up in the in the second half of the year here?
I mean, you know, I just think that there are certain markets where, you know, we, we would probably see a lot of activity. I mean, you think I think California has seen several deals recently. I think that'll continue. There, there are just certain markets that are, that are hot right now. You know, denver's a hot market, whether it's for consolidation or just new market entry, you know you know, markets such as Chicago. We've seen some smaller deals in the Chicago and Illinois areas as well.
So, you know, I think it really comes down to where the growth markets you know, Houston's another 1 that comes to mind. They had a wave of consolidation several years ago. Maybe there's some opportunity there. Dallas. It's it's those growth markets, the ones that people want to get into and maybe don't want to do it through a slow slow growth strategy through you know, de novo expansion.
What are the biggest kind of you know, you know, we, we've talked a lot in the at the larger bank level about, you know, some of the challenges that some of these. You know, regional bank transactions have had regulators have slow walked that. We're seeing some progress that, you know, they're, they're making, there's some commitments to kind of put some of these review decisions on more of a timetable. So that things are not just left here in limbo.
But first community banks, what are the biggest things that they need to be thinking that they need to be thinking about regular, whether it's regulatory obstacles, market obstacles, investor questions, as they pursue these kinds of deals for their own institutions.
Yeah, I mean, you know, the 1st thing is it could be seen as intuitive and that is, make sure you have your regulatory and your compliance house in order. Right? And we're talking about all the, the acronyms out there. It's you know, truth and lending act. It's going to be your BSA. A. M. L. You know, compliance, all those types of things, because, you know, as we've seen in the past. With a, you know.
Those are the situations where a regulator, you know, will want to see those programs airtight have the right talent on board before, you know, they want to, you know, sign off on a deal and you know, and we've seen, you know, in the past, you know, regulators don't usually reject deals. They just kind of, you know, Put them in a folder and put them, leave them on the desk until the banks withdraw the, the, the applications.
And we've certainly seen a few applications withdrawn in the last last few months, but at the same time I, you know, know that there have been several deals that have gone through the approval process a lot faster than maybe people would have surmised. So, you know, I think at the end of the day, Evan, it's a case by case basis. You really just have to make sure that you feel like you have your regulatory house in order.
You're clearly communicating with the regulators as you're going through the due diligence and the negotiation process with with another bank. And. You know, again, just making sure that you go into that announcement as squeaky clean as possible.
Any, are there any surprising deals that you've seen announced this year? Anything that kind of caught your eye as a you know, worth flagging for, for our listeners?
Yeah, I mean, you know, if you look at it, I'm kind of curious how this First Sun Home Street deal is going to going to play out. You know, I mean, if I remember correctly, First Sun that deal was announced at a at a low tangible book value for Home Street. I mean, obviously they've got some stuff that they're dealing with. First Sun has come out and increase the capital that they're going to raise for that deal.
Presumably, you know, because Home Street is going to address some of its as part of that process as well. So, you know, that's an interesting 1 simply just because there's so many moving parts. Involved with that you look at other deals. I mean, I mentioned the UMB Heartland deal. I mean, simply because that's a large deal simply because Denver is a interesting market and they're going to be a lot of folks out there that are going to want to capitalize on any disruption from that deal.
Should it close and move towards integration? You know, and, you know, again, I think there's some other ones out there as well. I know that, I'm just particularly interested. We've seen a lot of mutual mutuals announcing plans to combine as well, and obviously we've, it's been well documented that the mutual model is has been under a lot of pressure. I think there's only been one new one in the last few years, so as we continue to see Mutuals combined, that's something to be aware of as well.
Yeah, yeah. That was, we've seen, I, I think we've, we've seen a, a few examples both last year and this year of, mutuals coming together under the mutual under mutual holding companies and acceleration of, you know, that trend where they keep the 2 banks operating separately, but we are, we continue to, we see the acceleration and the we see, we see the consolidation of the shared services at the holding company level.
Exactly. I mean, the idea there, right, is to maintain a level of autonomy and independence. But like you said share resources, pool resources, because again, the expenses are so high and and mutuals have very limited ways to to to build capital, especially, you know, so I think that certainly makes sense. Another deal I should mention that that's definitely worth watching again. It's kind of on the larger side.
It's 1 of the larger deals this year's South State's pending deal to buy Independent Bank in Texas. I mean, if you think about that deal. Independent was usually an acquire and was you know, had built itself through acquisitions. And so, you know, obviously, some things change there and they're on the other side of that deal.
Any so Paul, you know, I know there you, you cover a lot of interesting stuff at your on your blog and website at the bank slate. Any, any interesting stories or trends you want to share with, with our listeners that you've been covering there?
Yeah, so there's several things, you know, again, I think I mentioned it, but I think it's really worth reemphasizing is that we are starting to see more banks take a look at their CRE. Positions are CRE exposure, not just on office space, but multifamily and we've seen several instances of banks going to investors.
The most recent 1 of being First Foundation going to investors, raising capital so that they can right size those those portfolios and hopefully, you know, you know, take their lumps early on in this and and and focus on growth over the long term. So that's certainly something that stands out. Another thing that I would just look at is, you know, again looking at you know, succession. I mean, I think we are starting to see some turnover and some key, yeah.
Management positions you know, I keep track with not just CEO turnover, but things like chief operating officers and CFOs. And I think we're starting to see some of those positions turnover as well. So and then a 3rd item that I would highlight talking about key positions is the compliance role. I did a piece not too long ago. Looking at how challenging it is for banks to retain and attract compliance staff.
So, you know, obviously, with heightened regulatory burden that's something to watch as well, because you certainly don't want to be that bank that has a compliance vacancy for an extended period of time.
Absolutely. That's you know, I mean, we, we spent a lot of time on that at ABA with it, just from the, from the training side, working with banks on trying to, on making sure that, you know, their existing staff are up to speed as well as, you know, training the next generation of of compliance professionals. What were the banks you're talking to?
What are they, what are they thinking in terms of how to navigate that challenge and make sure that they have those those critical roles filled for, for their institutions?
Yeah, I think number one is to have a deep bench, right? And to make sure that you're in a position where your top compliance officer not only knows their compliance you know, terminology and, and things, but they're also in a position where they can be a solid mentor to their deputy or to somebody else within the organization. I mean, that's number one, right? It's a lot easier and in some ways less expensive and costly to find the next client.
Person inside the organization, rather than have to go outside the, the, the bank to find that person. You know, then there's also just the, the idea that, you know, you can find folks from, you know, who have good compliance backgrounds that are not necessarily bankers. 1 area that we've highlighted is, you know, looking at the. Examiners, you know, there are examiners who do have a certain compliance mindset. They might be a candidate to bring in and also train as well.
So I think, you know, it's just going to be 1 of those situations where having that deep bench. Is important and, you know, again, we can also talk about how things like that play into consolidation as well. Because I mean, it may be that you are able to find a partner who also has the good talent pool to pull from as well.
Absolutely well, Paul, thank you so much for being on for taking a few minutes to share with us about your perspective on both on transactions as well as some of the other challenges and issues that are facing community banks right now. And here at the midpoint of the year.
All right. Appreciate it. I'll tell you 1 more thing, Evan. I think it'll be interesting to keep an eye on what what the budgeting is going to look like for 2025 as well.
I should have mentioned that just simply because I'm in the process of getting some feedback from bankers on that as well, because, you know, with margin still being tight with reg burden, et cetera, I'm just going to be really interested to see as well as with tech investing, just what bankers are thinking in terms of how much what the budgets are going to look like for next year.
Great insight. Great things to be looking for. Thanks so much for being on the show, Paul.
Great. Thanks, Evan.
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