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Banks keep using large, pricey deals to leap over $10B asset threshold

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Banks keep using large, pricey deals to leap over $10B asset threshold

Banks continue to find it beneficial to leap over the $10 billion asset threshold with a deal of size.

Sandy Spring Bancorp Inc. would be the latest community bank to jump into 10-figure territory with a merger through its $461.7 million acquisition of Revere Bank. When banks cross the $10 billion asset threshold, they become subject to the Durbin amendment, a provision of the Dodd-Frank Act that limits the amount of interchange fees banks can collect. President and CEO Daniel Schrider said the bank had been in discussion with regulators for several months ahead of the deal.

"We feel very prepared to move through that but felt that to do so, particularly given the Durbin impact, we wanted to do it in a meaningful enough way," Schrider said in an interview.

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Other bank executives appear to agree. Sandy Spring is set to become the eighth U.S. bank since June 30, 2018, to cross the $10 billion line with the help of a deal, according to S&P Global Market Intelligence data. Most of those deals have been sizable, with seven of the eight carrying deal values greater than $250 million, and five of eight over $600 million.

Sandy Spring estimated the Durbin amendment would hit its fee income by $3.1 million on a pretax basis. Other banks have offered even larger figures, with First Merchants Corp. projecting a $4.5 million pretax impact on its income and a $930,000 hit for its target, MBT Financial Corp.

First Merchants executives said on their deal announcement call they were expecting to surpass $11 billion to defray the Durbin impact.

"More scale and more efficiency coming out of this. So we're going to work through the $10 billion threshold and then quickly move to improve all of our returns back to the levels that they're at today and even better," said President and CEO Michael Rechin.

First Merchants had reached $10.7 billion of assets by the second quarter and then closed the deal on Sept. 1. With MBT Financial's assets at $1.3 billion, the bank appears on track to surpass $12 billion when it reports third-quarter results.

Even banks that have crossed the $10 billion asset threshold organically have found it beneficial to pursue deals that offered additional scale to defray the Durbin impact. WesBanco Inc. crossed the threshold in the 2018 first quarter and has since announced two substantial deals. It closed its acquisition of Farmers Capital Bank Corp., a $1.6 billion bank, on Aug. 20, 2018, and on July 23, 2019, it announced the purchase of Old Line Bancshares Inc., a $3.1 billion bank.

"Pro forma total assets of approximately $16 billion will provide enhanced scale to help cover the costs associated with the Durbin amendment and our infrastructure enhancements as part of crossing the $10 billion asset threshold," said President and CEO Todd Clossin during the bank's second-quarter earnings call.

But banks appear to be paying up to grow past $10 billion. All eight of the deals that pushed banks past the threshold over the last year carried deal values in excess of 170% of tangible common equity, and four of eight deals were over 200%. The median value-to-tangible common equity ratio this year has been 154.2% for all bank deals. Last year, the median was 170.6%.

Investors appeared to dislike Sandy Spring's purchase price relative to book value, which was higher than the bank's valuation. Sandy Spring's stock declined nearly 7% the day of the deal announcement. It bounced back about 2% the next day, a move that was largely in-line with broader sector indexes.

Two analysts wrote that the deal price was well worth it to bust through the $10 billion threshold. Erik Zwick, an analyst for Boenning & Scattergood, maintained an "outperform" rating on the bank's stock following the deal announcement. He wrote that the bank's discounted stock price was "undeserved" and was positive on the deal, calling the projected cost savings achievable and summarizing it as "a low-risk transaction focused on in-market consolidation and scale efficiencies."

Catherine Mealor, an analyst for Keefe Bruyette & Woods, was also upbeat on the deal, calling the target a "well-known, nicely profitable franchise."

"It is nice to see [Sandy Spring] back in the M&A game, and with a sizable, franchise accretive deal to help them cross $10 [billion]," she wrote.