Sandler O'Neill & Partners
THIS WEEK, WE ATTENDED the Gulf South Bank Conference in New Orleans. Presenting banks were based primarily in the southern U.S., including Mississippi (6), Florida (4), Louisiana (4), Arkansas (3), Texas (2), Tennessee (2), Georgia (1) and North Carolina (1).
In total, 23 bank management teams made presentations. With most banks having just provided an update on first-quarter earnings conference calls, new information was somewhat limited, though we did get a slightly better sense of how banks are thinking about certain earnings drivers and other issues affecting the balance of the year. Below we highlight our main takeaways from the conference.
Loan portfolios remain flat to down although some banks are optimistic for a return to growth in second-half 2010. The balance sheet was a common topic during presentations, with most management teams attempting to distinguish between ongoing deliberate reduction to loans (e.g., construction and development (C&D)/land balances) from the unintended shrinkage stemming from extremely low demand from borrowers (e.g., historically low utilization rates on commercial and industrial (C&I) lines).
Some management teams (Whitney Holding (ticker: WTNY), Bank of the Ozarks (OZRK)) were optimistic that positive loan growth would return during the back half of 2010, although projections from most seemed based on hopes for a continued economic recovery. We think the key question is whether end-user demand (in the form of increased line utilization for commercial borrowers and increased spending from consumers) can pick up the baton, so to speak, as government-led efforts to stimulate the economy over the past year begin to wane.
Many companies pointed to a very strong pace of core deposit growth in their presentations. While often acknowledging that this has been experienced by much of the industry, some management teams cited "flight to quality" as contributing to resulting market-share gains. Further, some presentations noted that this influx of core deposits has been used to reduce wholesale funding -- effectively making the funding base more core-funded, which we think should be beneficial as interest rates rise.
Several companies cited deliberate efforts being taken to prepare for an eventual rising interest-rate environment. For instance, some banks (BancorpSouth (BXS), BNC Bancorp (BNCN)) noted that they are extending maturities on CDs to lock-in attractive funding costs for the next two to three years, although noting that this often comes with a near-term sacrifice to the net interest margin.
Acquisitions were a common theme in most presentations. Many companies continue to cite their interest in Federal Deposit Insurance Corp. (FDIC)-assisted acquisitions, with some giving an update on recently completed acquisitions (BNC Bancorp, Hancock Holding (HBHC), Home Bancshares /zigman2/quotes/208559109/composite HOMB +3.42% (HOMB), Bank of the Ozarks), while others have yet to find a target of interest (BancorpSouth, Trustmark /zigman2/quotes/207971629/composite TRMK +2.46% (TRMK), Renasant /zigman2/quotes/200892803/composite RNST +2.36% (RNST)) -- often citing adherence to strict criteria in assessing potential targets (e.g., market location, deposit composition).
Additionally, a few acknowledged that with the less-generous terms on loss-sharing agreements and likely increased number of bidders, the most lucrative FDIC-assisted transactions have likely already occurred. To that end, several companies acknowledged the eventual return to traditional bank mergers-and-acquisitions as requiring consideration.
One company specifically cited Toronto-Dominion's /zigman2/quotes/202133558/composite TD +2.25% (TD) acceptance of only 50% loss sharing from the FDIC as a development that could effectively accelerate the return to traditional bank M&A. Moreover, with top-line growth stagnant (limited loan demand; sluggish fee-based income growth), the credit-recovery theme accelerating, and banks likely under pressure to deploy excess capital as conditions improve, we could perhaps see a return to traditional M&A sooner rather than later, as acquirers look to drive returns through cost savings and as they become more comfortable with the cumulative write-downs/credit outlook at potential targets.
On a separate note, we also noted increased optimism from some of the most troubled banks in the region. Our sense is that with private equity seemingly having been shut out from participating in FDIC-assisted transactions (but with funds already having been raised for that purpose), these funds are increasingly turning to the possibility of acquiring meaningful ownership stakes in very troubled firms. These funds provide access to capital for banks that have had difficulty accessing the capital markets more directly, and also would seem to encourage institutional investors to "take another look," given the participation (and sometimes very deep pockets) of an "anchor" investor group.
-- Joseph Fenech <BREAK /> -- Kevin Fitzsimmons
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