October 19, 2013

Is M&A at Small Banks Start Of Something Big?


Thursday was a good morning for those who recently went in on Camco Financial (NASDAQ: CAFI).

Huntington Bank (NASDAQ: HBAN) announced its acquisition of Camco for a value at approximately $97 million, including outstanding options and warrants.

Tim Melvin is one of those who bought in just last week. It was a stroke of luck for him.

"It could have been any one of the 25 or 30 (banks)," Melvin said over the phone. '"It was an accident."

Melvin said Camco had been on the radar for a while, its stock trading a pretty good discount to its tangible book value. His firm saw the Ohio-based bank assets dropping steadily over the last quarter and they eventually added it to their portfolio.

"This is the first of many," he said about the transaction. Melvin expects to see two dozen of the smaller banking firms shutting down or consolidating over the next few years. "It's a difficult time for the small-town banker."


Camco operated 22 banking offices throughout eastern and southern Ohio. It had over $750 million in total assets, but was able to sell it off very cheaply. Melvin said the smaller banks are being squeezed down by, among others, low interest margins and higher regulatory costs.

"We see the same story 30 times over," he continued, "small, cheap banks, have steady credit approval, pressure form the outside to fix or sell the bank."

Melvin saw activists and investors taking positions in the stock and when they finally got around to call reports, he and his firm pulled the string. Camco shareholders may elect to receive 0.7264 shares of Huntington stock or $6 a share in cash. He will wait on taking new shares of Huntington, which could change when he sees the new proxy.

"There is no room for organic growth," he said. Melvin sees no organic growth overall in the banking industry - Camco couldn't move anywhere because there is no business. The former stockbroker believes it makes sense for the smaller banks (25 branches or less) to sell. It's cheaper for the big banks to buy those small ones instead of opening up new branches.

"CAFI is just part of an ongoing story. Most will end up with the same fate."
Over the last 15 years, the number of banks has gone down, while the number of branches has gone up. Melvin said the only way to grow is to buy a competitor.

Melvin said by being the first of expected transactions over the next few years, the takeovers can now start to snowball. "There was no set of rules to play," he said, questioning what type of qualified mortgages and capital requirements would need to be in place for such a buy.

"Regulatory costs are going to be a lot higher for these banks," he added. The small banks are subject to the same rules of J.P. Morgan Chase (NYSE: JPM) and Citi (NYSE: C). The difference? The big banks have such a higher number of employees and customers.

Melvin says the current government shutdown does not come into play with these takeover. But as it continues on, Melvin rests easy with Huntington.
"I'll keep buying stocks at 80 percent book value while it works."


Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest. Click to watch Tim Melvin's FREE webinar and learn how to break through volatility using his valuestock strategy.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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