Mergers rise as local banks seek growth
Alexander Coolidge, acoolidge@enquirer.com 10 p.m. EDT September 27, 2014
(Photo: Enquirer file )
Story HighlightsBank mergers are speeding up to the fastest pace in nearly a decade.Industry watchers predict another 1,000 small banks will disappear in the next few years.Greater Cincinnati’s small banks collectively hold $7.7 billion worth of local consumer and business loans on their books.
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Bank mergers are speeding up to the fastest pace in nearly a decade as more small lenders get gobbled up by larger ones – including three banks based in Greater Cincinnati.
In 2014, the cause is less often weak banks failing, but smaller banks struggling to grow. A sluggish economy weakens demand for lending and low interest rates make remaining lending less lucrative, which in turn slows revenues for banks. As a result, more banks look to acquire smaller rivals to move the needle.
“There’s a lot of consolidation going on – and it’s a bad thing,” said Steve Wilson, chief executive of LCNB National Bank in Lebanon. Wilson, a former chairman of the the American Banking Association, added that tough regulations under the federal Dodd-Frank law have increased compliance expenses that further encourage banks to bulk up.
Wilson said there are industry predictions that another 1,000 small banks will disappear in a few years.
Deal-making is up 16 percent in the first half of 2014, the fastest increase since 2004. A survey of community banks by regulators this month showed 21 percent expected an overture to merge from a rival within the next year, while another 20 percent expected to make a deal offer.
Local banks such as First Financial Bancorp and LCNB have grown in 2014 through acquisition, but local institutions are being snapped up, too.
The latest deals: Early this month, Crestview Hills-based Bank of Kentucky agreed to sell out to North Carolina’s BB&T in a $363 million deal. In August, Wilmington-based National Bank and Trust Co. agreed to be acquired by Marietta-based Peoples Bank in a $109 million deal.
Greater Cincinnati is a tempting target. It has an usual concentration of more than 40 banks serving the region’s nearly $120 billion economy – the fourth-fastest-growing major city in the Midwest.
Clifton’s Columbia Savings Bank was the first local lender to disappear in 2014. Regulators shut it down in May and sold it to Evansville-based United Fidelity Bank. Columbia Savings was the 500th bank failure nationwide since 2007 when the real estate bubble burst, setting off a wave of regulator-brokered distressed bank sales. Bank failures peaked in 2010, accounting for 80 percent of mergers.
Since then, industry officials say, higher costs and thinner profits have pushed banks to combine – not out of desperation, but for profit and growth. Getting bigger allows financial institutions to spread added costs like compliance professionals.
“The smaller the bank the harder it is to absorb those extra fixed costs,” said Claude Davis, chief executive of Downtown’s First Financial Bancorp.
Last month, First Financial closed on the acquisition of three separate acquisitions of small banks that give it five new branches and a beachhead in the Columbus market. Davis said Columbus’ thriving economy made it an attractive market to enter and First Financial will build new branches as it grows there.
“Our strategy is primarily to grow organically, but when we find an opportunity ... we’ll make an acquisition,” Davis said.
Acquisitions have fueled First Financial’s growth since the 2008 financial crisis. A large community bank mostly in Greater Cincinnati, First Financial created a network of more than 100 branches from Columbus to Indianapolis through a series of deals.
The bank acquired dozens of local and Indiana branches in 2009 when West Chester’s Peoples Community Bank and two subsidiaries run by Columbus, Indiana’s Irwin Financial Corp. failed. In 2011, First Financial also acquired more than a dozen Dayton branches from Liberty Savings Bank and more than 20 Indianapolis-area branches from Flagstar Bank.
It has opened only 17 branches that it built in the last six years.
Crestview Hills-based Bank of Kentucky courted several unidentified local banks about potential mergers but was rebuffed. Chief executive Bob Zapp said slow growth and the lender’s failure to find a local dance partner led to it shopping itself around for a takeover.
Local banks safer, yet faceslow growth and high costs
Greater Cincinnati has long enjoyed an unusually large number of community banks that have helped power its economy. Excluding First Financial that has extensive out-of-market business, the region’s remaining small banks collectively hold $7.7 billion worth of local consumer and business loans on their books.
All of them exceed regulators’ capital requirements, most have low levels of problem assets and don’t appear in any danger of failing. Still, low interest rates set by the Federal Reserve to prop up the economy make lending less lucrative. On top of this, tougher bank regulations from the Dodd-Frank financial reform have added big costs for small banks.
Bankers says Dodd-Frank is so complex, small banks have been forced to add extra personnel to keep on top of all the new rules. It can be a significant burden for a small bank adding even one compliance pro – making a salary of $62,000 to $95,000.
For example, less than half of Greater Cincinnati’s 42 community banks made a profit of more than $1 million in 2013. Eight lost money. The region’s smallest lender, New Foundation Savings Bank in Colerain Township, made a profit of $19,000 and employs 11.
Sluggish growth prospects – and a generous takeover offer – were cited for reasons to sell by National Bank and Trust. Revenue slid by 7.3 percent to $30.3 million in 2013 and kept declining this year before it agreed to be acquired in August.
Local banks‘ strong capital positions suggest some are bulking up to make buys before they are bought.
Spring Valley Bank in Wyoming is a modest one-branch bank with 10 employees controlling $67.7 million in assets that generated $3.7 million in revenue last year. But the bank’s 39.1 core ratio makes it the highest-capitalized bank in the region. “We believe it’s important to maintain high capital levels – it allows us to make more loans,” said David Wittkamp, Spring Valley’s president.
Wittkamp says the bank would like to do more lending, which would lower its capital levels, but said acquisitions are not part of its plans. “It’s not part of our strategy,” Wittkamp said, admitting Spring Valley’s capital could support an operation four times its current scope.
Spring Valley is hardly alone. Regulators require banks to maintain a 5 percent core capital ratio to be considered “well-capitalized” – more than 30 local institutions have twice that level and eight have three times the required amount for regulators‘ top designation.
Cheviot Savings Bank’s core capital ratio was 16 percent just before it doubled in size when it took over Franklin Savings and Loan in 2011.
“Everybody tries to put their capital to use,” said Cheviot Savings’ chief executive Tom Linneman. Since the deal, his bank’s capital has crept back from less than 10 percent to 13.7 percent.
Linneman, who spent nearly five years wooing Franklin, noted banks need more than capital to buy, they need rivals willing to be bought out. “Unless they’re really on the market, it takes time,” he said. ¦
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