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Gaby Lapera: You mentioned a little bit earlier that merger and acquisition activity has increased.
Tim Hanson: Mm-hmm (affirmative).
Lapera: The Fed actually released a paper on this a little while ago. Post financial
crisis, smaller banks have kind of been gobbled up by bigger banks. Do you have any insights
into why that's happening and why that's continuing?
Hanson: Yeah, the first would be regulatory cost have gone up pretty dramatically. One
of the banks that I own personally, which I mentioned earlier, was called Carter Bank
& Trust. Mr. Carter continues to run Carter Bank & Trust and he has in his annual letters
to shareholders has various tirades that you can check out about how ... Specifically the
cost of regulation has gone up the past few years. Obviously, the reasons why that cost
has gone up and it's not solely without merit but when your fixed cost of doing business
goes up, if you're a small company, the very first, logical thing to do is to sell. Try
to spread that base, that cost base, over a larger breathe of operations. That's been
driving some people to sell. Additionally, as larger banks have needed more capital,
particularly tier 1 capital, the low cost loyal deposit bases that community banks have
start to look pretty attractive. Lapera: Mm-hmm (affirmative).
Hanson: Being able to buy those for 10, 15 cents per deposit dollar can be a pretty good
deal for some of those. You've seen players like Umpqua Bank and some others try to go
after regional rivals to make their balance sheets a little bit bigger. Thirdly, like
I said, having the scale in what has been a pretty tepid economy the past few years,
being able to be a little bit more geographically diversified so you're not quite as tied. If
you're Bank of Flint, Michigan, you're not just Bank of Flint, Michigan. Maybe you could
be bank of the entire upper mid-west or something. That gives you more opportunities.
Lapera: Right.
Hanson: You've also seen just a ... More evidence at that point, a lot of recent strategy for
some of these smaller banks is to just open loan production offices in larger cities.
Cascade Bank which is in Bend, Oregon has a loan production office in Portland now and
they want to open one in Sacramento. They're not going to take deposits in those markets
but they want to be able to make loans in those markets. Similarly, Suffolk Bank, which
I mentioned earlier, has opened some loan production offices closer to New York City
where the economy is a little bit more dynamic than it is out on the east side of Long Island.
I think the trend towards consolidation will continue, and that can be a good thing for
investors because generally speaking, something will get acquired at a premium to its market value.
The other idea here is that in the world of community banking, there's this still this
ideal of the gentleman banker. There are no hostile take overs in community banks. Mr.
Carter, for example, will probably have to make it known that he's interested in retiring
before any offers will materialize for Carter Bank & Trust. It can be a little bit slow
moving even though that trend is certainly accelerating.
Lapera: That's really interesting. I remember reading about, I want to say it was M&T Bank
was trying to acquire a smaller bank I think in Maryland. It ended up being a disaster
for them, it took them 5 years, because there was money laundering happening at that bank.
The Federal Government was like, "You have to make sure that this doesn't happen again."
The amount that they were laundering, it wasn't huge amounts. It wasn't like $50,000, it was
like $10,000 or something which I know sounds like a lot but for banks that's not a lot
of money. It’s definitely an interesting proposition for larger banks.
Hanson: Certainly you want to know what you're buying.
Lapera: Yeah. That came out of the blue for them
Hanson: That's true, that's certainly. You hope internal controls at any bank are strong,
because bank failures, whether they're small or big are uncomfortable for lots of different
people involved. Lapera: Yeah.
Hanson: There are a couple hedge funds that specialize in trying to do activist campaigns
against small banks. Stilwell is one, for example. They, for example, make sure that
whenever they try to be hostile or activist with a small bank, that there are no large
insider shareholders or community shareholders because it's very hard to get them to vote
against ... In the same way they're loyal to the deposit base, they're loyal to the
bank. They spend a lot of time tactically finding votes, counting votes, figuring out
how many shares they need to buy to actually exact change at an actually meeting. It is
a chummy sector which is kind of an interesting dynamic that you don't find in a lot of places
in the stock market anymore.
Lapera: Yeah, definitely not.