This past week was something of a bank earnings nirvana. Dozens of community bank reported their second-quarter results, which made for a busy weekend for me.
While I don't mange my portfolio or make any snap decisions based on quarterly reports, I do read all the reports and conference call transcripts. I spent most of the weekend with MLB TV on in the background reading all the reports. I think that trading around earnings season or running your company to meet the short-term numbers are horrible practices, but the reports contain useful information so they need to be read and reviewed. This quarter three things were obvious after digesting the mountain of pages.
The first is that for the community banks credit conditions remain strong. Although there has been talk of credit being the best it could possibly be, for most of the banks in my universe conditions actually improved. Banks have been fairly tight about underwriting standards since the credit crisis and it shows in the loan portfolio. Nonperforming assets and delinquent loans remain very low for most of my banks. Residential and commercial real estate markets remain strong across most of the nation and the economy is just strong enough that borrowers are having no difficulty making their payments.
Second is that M&A is still very much the rule of the day. I do not recall a quarter where so many bankers expressed a desire to buy smaller banks to achieve the scale needed to deal with higher regulatory and technology costs. Organic growth is hard to achieve and if you want to grow you have to buy. We know from the recent KPMG survey that 40% of bankers think they will be involved in M&A as a seller, so there are plenty of targets out there.
Bankers were pretty specific about what they were looking for in M&A. Kevin Cummings, the CEO of Investors Bancorp (ISBC) , was asked on his call about M&A and he said: "Certainly deals of $1 billion, but really deposit-rich organizations that enhance the deposit franchise. And it could be anywhere from $1 billion to $5 billion. And looking in the, not going down to Florida or anything like that, that are contiguous to our geographic franchise."
He specifically mentioned Long Island and Philadelphia as areas where they want to expand the franchise.
Gerard Host of Trustmark (TRMK) was equally specific about his banks plans. When asked about his plans for M&A he told investors: "As far as where our focus is it remains in the South East. We would like to expand in some of the growth areas within states like Alabama and Florida. We do not have a footprint in Georgia and we believe that would a good opportunity for us. And obviously, Texas remains a state that where we are primarily in the Houston area, we are doing business in some of the other markets and could be helpful to have the positive footprint, a banking footprint in some of those other metropolitan market in Texas. So that's where our focus is from a geographic standpoint. Size standpoint we said, we will do any opportunity that we think enhances long term value somewhere in the $300 million to $3 billion size, our opportunities that we have taken advantage of before and can manage we believe are in the scope of our ability to manage."
The banks are telling you what and where they are going to buy. I don't have enough space to review the dozens of banks that talked about doing M&A, but they are all along the lines of $300 million to somewhere between $3 billion and $5 billion in assets. It doesn't take a rocket scientist to put together a target list of community banks that may fall into the clutches of one of these acquisitive banks.
My final takeaway from the weekends reading is about Texas banks. The general consensus has been that Texas, particularly Houston, was going to be a trouble spot as energy loans turned sour and the overall economy in the state weakened. The bankers themselves do not seem to think that's the case.
I read several comments and the remarks of Jerry Salinas of Cullen Frost Bankers were representative of bankers feeling about the Lone Star State right now.
"The Texas economy continues to grow, thanks to market and industry diversity, population growth and a business friendly environment," Salinas said.
Regarding Houston specifically he told investors that "(d)espite shedding 20% of its energy jobs since employment peaked 18 months ago, Houston continues to add jobs in refining and petrochemicals and health care services. Houston overall employment is down about 1.2% year to date, although its 4.7% unemployment rate it's still lower than the national average."
The trade of the decade is very much alive and well and the bankers themselves are telling you where to look for potential takeovers and high-growth banks.