What we heard at AOBA

Why are community bank mergers increasing?

Brian Graham, Jonah Crane, and I attended Bank Director Magazine’s aptly named (and this year equally aptly timed) "Acquire or Be Acquired" Conference last week - here are our observations and comments. 

Given that AOBA is an M&A conference, it’s perhaps not surprising that all attendees believe the stars are aligned for more bank mergers, especially among community banks  - but there was little consensus on when that might happen.  

• Tom Michaud, CEO of KBW, noted the expectation is for more “timely application response rates” and removal of “anti-M&A policy.”   

• Bellwether transactions that have been announced (e.g., Capital One/Discover) and the expected return of regional and larger banks (Category 3 and 4) as buyers will likely drive bank management teams’ FOMO (as either buyers or sellers).

• The return of higher rates may prove a headwind, but with bank stocks having rallied last year, capital is available to support transactions.

Favorite Parlor Game? - Who will be the next head of the FDIC - Current Acting Chairman Travis Hill, KBW CEO Thomas Michaud, or someone else?

Anticipate the coming subdebt wave - Over $20 billion of subordinated debt (per Klaros Capital research) will be callable, begin its floating phase, and begin to lose favorable capital treatment over the next 24 months. This wave results from banks seizing the unique opportunity of zero rates during the pandemic, concentrating maturities (and thus refinances) into a short window. Marshaling the investor capacity to handle this wave will be challenging. 

Forecast the future - Along with Eugene Ludwig, Founder & CEO, Ludwig Advisors and Andrew Olmem, Partner, Mayer Brown, Klaros’ Jonah Crane participated in the panel, “Advice for the Future: Setting the Stage for 2025.”  Below are notable soundbites.

• Regulation and Supervision:  The banking industry is over-regulated and the regulatory process could be more streamlined. “1996 CRA regulation I wrote was too wordy at 11 pages in the Federal Register with 5 pages of commentary. The most recent proposed rule is 115 pages with 450 pages of commentary.” - Gene Ludwig

• Prioritization of supervision is critical: “SVB had 34 matters requiring attention (MRAs) but only one of them” related to the issues that led to its downfall. - Jonah Crane

• Fintechs and Innovation: The panel agreed that the new administration will be more open-minded about innovation and the relationship between fintechs and banks. Further, the panel agreed that the banking industry “needs an environment that encourages banks to use modern technology” and that “there is a greater need for innovation inside the banking system than outside.”

• CFPB:  “The fundamental thesis of CFPB - that safety and soundness and consumer protection should be separated - was flawed. Further, with the formation of the CFPB, the safety and soundness regulators did not eliminate their consumer protection divisions.” - Andrew Omem

• Deposit Insurance:  The playing field between small and large banks is not level and panelists agreed on the need to increase insurance limits. Could there be a two-tiered FDIC insurance system? Can we raise the insurance level so that community banks can operate on the same field as the largest banks? Small bank failures where depositors are haircut will increase pressure on Congress to act.

The overall mood was “wait & see” - To inform strategic and tactical decisions, many attendees are trying to read the tea leaves on agency heads and long-term interest rates:

• In an environment where “personnel is policy,”  who will lead the regulatory agencies and how will that impact supervision, application cycle times, and de- and re-regulation?

• Will long-term interest rates remain high for longer or will the long end come back down? 

The consensus was that how these evolve will have a considerable impact on the future of M&A. Only time will tell.