I am normally a nice quiet guy. I do not like the real loud shrill, look at me, buy my newsletter marketing approach. In fact it annoys me that that approach seems to work so well. I like to just go along present the fact and let folks make an intelligent decision. Today however I am going to speak up a bit. So listen up. Put down your moochie pie charts, quit drawing lines from one random point to another, talk to your doctor about your falling hammers and rounded shoulders and let’s talk about making some money.

Investing in community banks stocks has always been a profitable undertaking when proper attention is paid to financial strength and the price paid. More than one business man has retired quite comfortably as a result of ownership of a stake in the banks in town. The bank consolidation trend has been going on since the late 1980s and will continue for decades to come. The last time we had one of these acceleration periods like we are starting to see now was in the 1990s and people got filthy rich buying in the aftermath of the savings and loan crisis. Over the next decade the bank stock indexes went up ten fold. We are there again and there is a long way to go and a lot of money to be made.

Rather than take my word just consider what the experts are saying about this idea of bank M&A as a source of profits. Merger market and Merrill Data Site released their Deal Drivers Report today and looked at M&A activity in the US by sector. The opening paragraph flatly states “Deal making among financial institutions should continue at a fast clip in the second half of 2015 led by more large deals in insurance, and continued M&A in asset management and community banking.” They go on to say " Bank M&A activity, in terms of number of transactions is up, and should continue. When interest rates rise, earnings for banks will improve due to their reliance on net interest income and is likely to provide an impetus for more to sell, said Arthur Loomis, founder of Loomis & Co, a New England based investment bank. Banks under US$250m in assets comprise the bulk of deals, as these banks are under the most pressure from growing regulatory costs, Loomis said.”

That’s where we are right now. This is stage one. However there is more to come. According to the report “Banks are increasingly separated into buyers and sellers, based on size, location and earnings capacity, an activist investor said. Banks trading at higher multiples to book can buy without dilution, and are empowered by higher market capitalizations to make stock-based purchases, he said. Ultimately banks that have been consolidators themselves should become targets for larger regional banks as they reach US$10bn to US$15bn in assets, he said, but regulators will need to reduce roadblocks on larger deals for such sales to become common place.” So, the investment bankers see what is going on and recognize that the bank takeover wave is going to last a long time.

One of the guys that got filthy rich the last time around was Dallas Investor Gerald Ford. He has bout and sold several banks over the past three decades and is a billionaire because of it. In the aftermath of the most recent crisis he used all the cash in his controlled company Hilltop Holdings (HTH)and bought banks insurance companies and a brokerage firm in Dallas. He also has a private equity fund that recently bought a stake in Mechanics Bank out in California. One of his fellow mangers of that fund, Carl Webb, recently talked to the San Francisco Business Times and told them that ““We’ve subscribed to this theory that there’s over-capacity in the banking system in this country,” Webb said. “What we’re typically able to do with a larger bank is to buy a competing bank, take out 45 percent of the costs and retain 97 percent of the deposits. That’s a hugely accretive business model and everyone’s employed it from Wells Fargo to us and everyone in between.” So the private equity type buyers get it and understand that smaller banks are going to bet bought by bigger banks. Some Like Ford Financial are buying into larger banks so they can get in on the party and do some of the buying themselves. As long as that dynamic is still there, bank acquisitions will continue,” Webb said, noting that community banks are facing serious headwinds with costly new regulations and low interest rates pressuring profits. “Size and scale have become more important. It’s become a size-and-scale game for a lot of reasons but especially due to regulatory pressures. “

Also out in the Bay are we got this recently. "It does seem in this prolonged low rate environment that acquisitions are the new organic growth," First National Bank CEO Tom McGraw told the San Francisco Business Times. "When rates begin to move up organic growth will be more… organic."

Now let’s hear from Ed Sloan the CEO of Peoples Bancorp (PEBO) of Marietta Ohio a bank that has been on a bit of a binge buying 4 banks in the last few years. He said “Regarding bank acquisitions we do not anticipate doing a deal this year, but hope to be active in 2016 when earnings are restored to the appropriate level. In the interim we will continue to maintain an active prospect list and explore new opportunities. Our M&A strategy remains the same. We'll focus on filling in our existing markets in Ohio, West Virginia, and Kentucky and evaluating opportunities to expand our presence in Ohio. We'll also look at extending our Kentucky footprint into the Louisville and Lexington areas” he not only told you he wants to buy more he told where he was going to buy them!

The there is this from a Reuters article earlier today “Consolidation among U.S. banks, particularly capital-squeezed small- and mid-cap lenders, is set to rise in the next year or two due to persistently low interest rates, RBC banking analyst Gerard Cassidy said. The increase in deal activity will also be driven by expense pressure from the new regulatory environment, Cassidy wrote in a note to clients. U.S. regional banks have long complained that capital reforms, intended to rein in the excesses of bigger banks, have placed undue burdens on smaller lenders.”

SNL Financial has been all over this trends, Nathan Stovall of SNL recently was at the KBW Bnak Conference and reported that “M. Ray Cole Jr., president and CEO of Hattiesburg, Miss.-based First Bancshares Inc., said his bank is looking for acquisitions of banks with assets between $200 million and $500 million and there now seems to be a lot more activity among potential targets of that size. Cole said his company does not run into much competition when courting those institutions, either."We think there are a lot of potential acquisitions out there for us, particularly on our end of the space," Cole said at the KBW event.” Mr.Stovall reported that at the same conference CenterState Banks Inc. President and CEO John Corbett said the company would like to increase its presence in Jacksonville, Orlando, and Tampa, Fla., but noted that there have been a handful of transactions in those markets where pricing did not make sense. He said CenterState could acquire another bank with assets around $1 billion, following its purchase of $1.1 billion-asset First Southern Bancorp Inc. in 2014, though he noted that most sellers are smaller in size. Corbett said the company is considering whether it should look for deals in a second-tier market, where it could acquire a smaller bank, achieve significant cost saves and then redeploy the deposits of the target institution in other markets.

Bank Director .Com said it pretty bluntly. They wrote “Growing by acquisition is much easier for smaller banks than larger ones, which suffer from “too big to fail” scrutiny and acquisition limitations. Of the 301 deals done in 2014, only five had deal values in excess of $500 million. Most of the activity is in small banks. While the total number of financial institutions has shrunk from 15,158 in 1990 to 6,419 today, the number of banks between $100 million to $10 billion in assets has grown from 4,194 in 1995 to 4,400 at March 31, 2015: a growth rate of 5.9 percent, representing over 68 percent of the number of financial institutions. The M&A activity will remain healthy for the next several years as those who do not have the ability to grow and cope with the pressures will have to sell.”

I asked the CEO of Sunshine Bancorp (SBCP) not long ago if the thought M&A activity would continue and he told me “Absolutely. Absolutely. Particularly in Florida, there are roughly 170 banks left in Florida. A bulk of them are small community banks. And with the regulatory costs, the compliance costs, people are going to have to partner up and be able to move ahead. And the only way I see that happening is really for people to partner up. So, I do believe there'll be continued consolidation going on in the marketplace. It has to, because scale is the only way to really deal with these costs that are out that.”

The bank CEOs are telling you it has to happen. The regulators have said it is going to happen. The investment bankers know it is going to happen. The private equity guys know it is going to happen and are positioning themselves to profit when it happens. The activist investors are out there buying stock and pushing to make happen. Banking on Profits subscribers know it is going to happen and they are already making money from the trade of the decade. We beat the market last year and we are crushing it this year.

Now you know it. You can either use it to make money the old fashioned boring way or go back to chasing hot stocks, drawing squiggly lines and swirly patterns on charts and all the other activities that caused individual investors to underperform stocks bonds and inflation for the last three decades. If you choose the former I have been buying bank stocks since the early 1990s and can help you find those that are likely to make you money over the next decade. Click here to join Banking on Profits if you are not already a member.

Have a great week

Tim

Community Banks- The Trade of the Decade - https://www.youtube.com/watch?v=3fa4HUiFJ6c