IN THE CLOUD: Economic concerns seen as damper on bank M&A

The only banking trend in 2019 that seems certain is a focus on uncertainty.

Several banking experts based in Pennsylvania noted recently that they don’t expect an extraordinary amount of merger and acquisition activity in the new year, even with a more favorable regulatory environment in Washington, D.C., and the positive effects of tax reform.

Jeffrey P. Marsico of the Kafafian Group in Hanover Township, Northampton County, said he expects mergers will be relatively static compared to recent years as banks gauge what will happen with the economy later in the new year and into 2020.

“I think on a percentage basis it will be similar to previous years, maybe 5 or 6 percent,” said Marsico, executive vice president at Kafafian, which offers finance, strategy and operations consulting to community financial institutions. That will equate to perhaps six or more actual deals in 2019, he predicted.

He and others said the biggest trend in 2019 will be one of uncertainty, with financial institutions remaining relatively conservative through the new year because of growing concerns of a downturn.

“The threat of a recession worries bank boards,” Marsico said. “We are in the largest expansion in history, if not the second-largest.”

“The last recession was terrible, so they are a little fearful,” he added. “But no one is predicting a 2007-2008 recession again. It will be much milder.”

David W. Patti, a spokesman for Customers Bank in Wyomissing, agreed, saying many banks will be hunkering down in 2019 and not looking to make dramatic moves.

“2019 is a year to get your house in order,” said Patti. “There is an increasing belief that a recession is coming in 2020.”

Speaking generally about the industry’s concerns, he said, “I think that would have an impact on a willingness to merge … I think people will be sitting on the sidelines for now.”

As for Customers, Patti said, “We are not entertaining anything, nor are we looking.” The bank has assets of about $10.6 billion and branches in seven states and the District of Columbia.

A combination of factors – rising wages, increasing interest rates, global instability and other issues – indicate a recession is likely, he and others said.

“It sort of almost has to happen because you have one every decade or so, and we are overdue,” Patti added.



Marsico said activity in mergers and acquisitions might center on smaller banks buying ones of similar size or smaller community banks being bought by larger community banks, especially banks that are having difficulty investing in the technology and personnel necessary to remain competitive.

“The smaller ones that can’t do that will fall a little bit more behind,” he said.

Marsico noted the declining number of FDIC-insured institutions since 1990: There were 463 then in Pennsylvania compared to 156 now, leaving fewer opportunities for deals. The state decline mirrors the national trend, where the number of FDIC-insured institutions went from 15,158 in 1990 to 5,477 today, according FDIC data through Sept. 30.

Large banks still regrouping after bigger mergers in recent years likely will focus on core operations, rather than expanding further through acquisition or merger, observers noted.

American Banker reported Nov. 18 that 34 acquisitions had been announced nationwide since the end of August, largely involving community banks. Among those is Orrstown Financial of Shippensburg, which is to buy Hamilton Bancorp in Towson, Maryland, and Citizens & Northern of Wellsboro, which plans to buy Monument Bancorp in Doylestown, the trade magazine reported. Both deals are expected to close in the second quarter of 2019.

David W. Freeman, president of QNB Bank, which has 11 branches in Bucks, Montgomery and Lehigh counties, said his community bank often benefits from merger deals because customers become dissatisfied with the changes and will seek out the services of QNB.

“For us, that is good for us because it creates business interruption,” he said of mergers.

He, too, thinks a lot of banks are concerned about an economic downturn, which might prevent them from being too aggressive in 2019.

“Any time there is uncertainty in the marketplace, people tend to be a little more conservative,” Freeman said.

As for QNB, it intends to focus on its core business, he said. It has nearly $1.2 billion in assets.

“Our goal is to grow organically,” he said.

One bank that has grown this year through mergers is Mid Penn Bancorp, based in Millersburg north of Harrisburg in Dauphin County.

In January, Mid Penn expanded into western Pennsylvania when it completed its acquisition of Scottdale Bank and Trust, a deal that was first announced in 2017. Then in August, Mid Penn completed a purchase of First Priority Financial Corp., which allowed the bank to expand into southeastern Pennsylvania, including in Berks, Bucks, Chester and Montgomery counties. Mid Penn reported then that the combined bank would have assets of about $2 billion and nearly 40 branches around the state.

Both mergers have gone smoothly, said Rory G. Ritrievi, Mid Penn’s president and CEO.

“I couldn’t be more pleased at the way the deals came together,” Ritrievi said, adding that he wouldn’t rule out other deals in 2019. “We would never say never,” he said.

In 2014, Mid Penn merged with Phoenix Bancorp Inc. based in Minersville. While the mergers have extended Mid Penn’s reach statewide, the bank has been growing organically by 10 percent to 15 percent, he added.

He doesn’t think a recession is around the corner, noting that such predictions easily could be wrong, even if there are some “storm clouds” on the horizon such as trade conflicts and interest rate increases.

“I don’t see any reason to say there is going to be a recession in 2020,” Ritrievi said.

Even if the country were to enter a downturn, he suggested, it could mean even more merger activity, not less.

“It is hard to stay a small community bank,” Ritrievi said. “That doesn’t mean community banking is going away, but it does mean it is changing.”

For anyone contemplating a merger, he added, he advised that they should “trust your instincts.”

He said he knew his bank’s recent mergers were “the right thing to do,” so his team set a course that made the difficult work worth the effort. The consolidation of staff and cultures is not easy but has gone well.

“Here we are now at the end of it, and it changed the dynamics of the company and catapulted us into a new level of performance,” he said.

Like Marsico, Ritrievi also thinks the number of mergers in 2019 will be comparable to recent years, with six at the lower end.

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