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As acquirers look for scale, small banks face shrinking buyer universe

Certain small banks looking to sell might have a tough time finding a buyer.

With steady deal activity in recent years, many serial acquirers have grown substantially and may no longer have interest in smaller targets, bankers and analysts said at D.A. Davidson's Financial Institutions Conference in Denver last week.

Conference attendees were more bullish on deals involving larger banks, especially as Congress is expected to pass a regulatory reform bill that increases the $50 billion asset threshold for systemically important financial institutions.

Meanwhile, there is a healthy pipeline of smaller banks looking to sell as they struggle with regulatory and technology costs. Bankers have often talked about $1 billion as a key asset threshold that banks need to reach to handle those expenses. Banks below that level looking to sell might have trouble striking a deal despite rising deal prices and a more accommodative regulatory environment.

"Especially in rural markets, there's not a lot of appetite for those franchises," said Jay Tejera, an independent bank investor based in Seattle. "The cost of doing the data processing conversion and the advisory costs can be a significant percentage of the deal." Tejera also pointed to Community Reinvestment Act concerns in rural markets since regulators might disallow any branch closures that make a deal more attractive.

Further, small banks are finding it difficult to attract talent and compete for assets since many focus on commercial real estate lending, which has become increasingly competitive, noted Wintrust Financial Corp. COO David Dykstra.

Still, he said small banks eager to sell can do so at the right price.

"A lot of them are looking to sell," he said in an interview. "If their price expectations are reasonable, I think they'll find bidders."

With many small banks on the auction block, buyers might have the advantage. Over the last few years, several larger community banks have done multiple deals in an effort to leap over the $10 billion asset threshold that subjects companies to significantly more stringent and costly regulation. As those acquisitive banks grow larger, smaller deals that had been under consideration might no longer make sense.

"If you're a $500 million bank and you had someone on your dance card who was $5 billion and now they're $15 billion, have they now gone away from being your natural acquirer?" asked Jeff Rulis, an analyst for D.A. Davidson.

On May 14, Cadence Bancorp. announced a deal to buy State Bank Financial Corp. in the largest bank deal by value in a year. Cadence, which reported $6.5 billion of assets five years ago, will grow to roughly $16 billion with the acquisition.

With more than 4,000 banks reporting less than $1 billion in assets, it is difficult to generalize on all small banks.

"We're working on one small-bank deal and there's a long list [of potential buyers], and we're working on a similar-sized bank in another geography and there's a limited buyer list," said Rory McKinney, head of investment banking for D.A. Davidson.

McKinney noted that some smaller banks could shift to acquisition mode to take advantage of the changing deal landscape.

"I think that new buyers are going to emerge because the banks that are $5 billion to $10 billion and above are not focusing on those smaller deals," he said. "So, I believe it's an opportunity for those banks in the $1 billion to $2 billion range to do three, four or five transactions over the next three years so they can get some scale."