While big banks have shied away from making major takeover deals since the dark days of the financial crisis, smaller banks have stepped into the void in a monumental way.
In a post-crisis mergers-and-acquisitions frenzy, some lesser-known institutions have increased assets by 7,000 percent or more. They've used a combination of regulatory benefits, strong flows of private investor money and government help to gobble up scores of smaller institutions.
Industry experts say the trend likely will continue even if the pricing isn't quite as friendly as it used to be, presenting opportunities for retail investors to dabble into a space they often avoid.
"The smaller banks have a lot more capital per dollar of assets than the big guys do. They also tend to be more effective at managing credit risks," Christopher Whalen, senior managing director at Kroll Bond Rating Agency, said in an interview. "There's a lot of great stories out there."
Consider a few: Talmer Bancorp, whose leading investor is vulture capital legend Wilbur Ross, has seen its assets explode by 7,763 percent over the past five years (from the second quarter of 2009 to the same period in 2014) thanks to seven bank acquisitions, four of which included government assistance, according to SNL Financial. Talmer, which now has $5.6 billion in assets, is the successor to First Michigan Bancorp and went public in 2014.
Another huge winner has been State Bank Financial, which also has scooped up seven banks and boosted its assets by 7,316 percent to $2.58 billion, according to SNL.
Each of the top 20 fastest-growing banks is in either the small- or mid-cap space, and most have used M&A as the primary engine. Several, such as FCB Financial, were established purely as shell companies to gobble up troubled banks. In all, the group has done 64 deals during the five-year period, SNL said. Of that number, 23 came with government help.
It's all been part of a trend that has seen the number of banks decline precipitously since the end of the crisis, with much of the losses coming at the community end. Total banks from the end of 2008 through the middle of 2014 fell from 7,566 to 6,164, a decline of about 18 percent.
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While on the acquisition binges, stocks in these banks have generally gained significantly yet underperformed broader bank benchmarks such as the KBW Bank Index, which is up about 150 percent over the time period.
However, when analysts look to future industry growth they see an emerging story: Slow-footed larger banks that will struggle under a regulatory yoke to be able to deploy cash easily and efficiently vs. smaller, more nimble institutions that have grown while cementing community relationships. Perhaps most importantly, the smaller institutions are the favorites of industry regulators since the too-big-to-fail nightmare of the past decade.
"The execution, the quality of services—all those factors come into play for the smaller banks, whereas the big guys can't get it done," Whalen said. "They have effectively private bankers managing relations with iPads. These people don't sit in a branch all day. They're out in the field."
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From an investing standpoint, Whalen said the opportunity is primary for the retail crowd as larger institutional investors shy away from the lightly traded stocks because they aren't liquid enough for trading purposes.
The investing choices also lie with the acquirers, as the banks being bought up are often private institutions whose shares aren't available on exchanges.
Jefferson Harralson, managing director at Keefe, Bruyette & Woods, has a list of "teacher's pet" stocks that he said investors looking to cash in on the M&A movement should keep in mind. Here are a few:
"Regulators over the last five years have been discouraging M&A among the biggest buyers, which is what has opened a strategic spot for small- and mid-cap banks to get a lot of deals done for relatively attractive prices," Harralson said.
Though small buyers have dominated the action, Harralson said BB&T's recent acquisition of Bank of Kentucky for $353 million is an indication that larger firms may join the industry shakeout. On the downside, such competition could make pricing levels less attractive though still tantalizing for institutions looking to grow.
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"The current sellers are really almost too small to get the attraction of the bigger buyers," he said. "Predominantly it's going to be the small- and mid-cap banks doing the acquiring, with a sprinkling of big banks here and there."
