After sitting on the sidelines for a year, Charlotte’s largest community bank is once again entertaining the idea of buying other banks.
The question is: Will Park Sterling Bank, and others, be able to seal another deal in the near future?
James Cherry, CEO of Park Sterling, certainly thinks so. The bank has taken off the pause button after a self-imposed moratorium on mergers and acquisitions while it completed its purchase of Gastonia-based Citizens South Banking Corp. – a $77 million deal that was finalized last year.
“Our approach is to find other banks that see the future the same way we do, that believe that they can be more successful by gaining additional scale through partnership,” Cherry said.
Community banks are being squeezed by regulations and shrinking margins, which is prompting many to look for ways to grow through acquisitions – or, in some cases, to be acquired.
But two factors are holding back mergers and acquisitions, said Charlie Welch, managing director for McColl Partners’ financial institutions group. Buyers are looking to purchase banks for as cheaply as possible, but banks want a fair price. “M&A activity is not robust at the moment,” Welch said.
“Both buyers and sellers will need to adjust their pricing for M&A activity to pick up,” he said, adding that sellers’ price expectations may still be too high and buyers have not been willing to take on much risk.
Merger and acquisition activity among U.S. financial institutions rose slightly in 2012 from the year before, according to the Federal Deposit Insurance Corp. Last year, 208 FDIC-insured financial institutions were absorbed through mergers, up 5 percent from 198 in 2011. Those annual figures are a far cry from the 321 mergers of 2007, before the recession cut that by nearly half in 2009.
Since the recession, bank deals involving Charlotte-based banks include Elkin-based Yadkin Valley Financial Corp.’s purchase of Charlotte’s American Community Bancshares in 2009 and last year’s acquisition by High Point-based BNC Bancorp – parent of Bank of North Carolina – of Charlotte-based First Trust Bank.
Anthony Gaeta, a lawyer with Raleigh-based Wyrick Robbins Yates & Ponton, who specializes in community bank mergers, said he’s not expecting a large number of bank mergers and acquisitions in North Carolina in the near future.
“Do I see a tidal wave coming? No,” he said. “But do I see a continuation of the uptick in M&A? Yes.”
Welch said the preference of banks is to stay independent, rather than merge with another bank. Banks that tend to sell are the troubled ones, he said. But there’s not much buyer interest in troubled banks, he said.
At Park Sterling, Cherry said the bank’s growth strategy is twofold: acquire banks and open branches in fast-growing markets.
The bank, headquartered on East Morehead Street, has about $2 billion in assets. It’s open to big deals that might double its size and smaller ones that could increase its presence in some markets or allow it to enter others, Cherry said.
“It might be something that would lead us into Virginia,” he said.
Cherry said community banks and smaller banks have been challenged in recent years as new regulations have resulted from the downturn. Complying with those regulations has been costly at a time when banks’ net interest margin has been compressed, he said.
Net interest margin is the difference between what banks pay in interest for deposits and what banks earn in interest on loans. Most small and community banks rely solely on net interest margin, Cherry said.
“And that margin has gotten smaller and smaller,” he said. “At the same time … people are borrowing less and less.”
Small and community banks, because of their size, typically don’t offer other products or services, such as cash management, that could generate other sources of revenue, he said.
That means banks will need to grow, he said. Growth could come from opening branches in new markets or through mergers and acquisitions.
“That doesn’t mean they have to become $20 billion, or $40 billion or $60 billion” in assets, Cherry said. “But it may mean they need to be $1 billion, $3 billion or $5 billion or more in size in order to provide a broad array of products and services and to have other sources of revenue.”
Since the recession, pundits have been predicting a wave of bank mergers and acquisitions as financial institutions have faced new federal regulations, primarily those in the 2010 Dodd-Frank financial reform act.
“It’s been no fun in the last four years or so to go to board meetings of community banks,” Gaeta said. “The way they’re getting beat up by the regulators, it takes a toll on these bankers.”
Welch said he wouldn’t be surprised if Park Sterling were to announce this year that it’s acquiring another bank.
“They’ll certainly be in the market, but they’re going to be disciplined.”
Cherry said Park Sterling is in talks with other banks about potential deals.
But he would not say if any of the banks are in Charlotte.
“We’re looking everywhere,” he said.
Roberts: 704-358-5248; Twitter: @DeonERoberts
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