Why troubled banks aren’t merging to ease financial pressure

Some Philadelphia-area lenders were among those whose ratings were cut by Moody’s Investors Service last week, including New York state-based M&T, which has branches across Delaware and central Pennsylvania, and a smaller network in the Philadelphia area; and Lancaster-based Fulton Bank, which has targeted the city for new business in recent years. In Fulton’s case, Moody’s — which provides investors with credit ratings, risk analysis, and research on stocks and bond — said it may have to cut again, citing the bank’s higher-than-average dependence on commercial real estate loans, which could prove problematic as office values are falling.

The longer interest rates stay up, and office buildings stay vacant, the worse for lenders who finance construction, and builders who want their loans.

Larger banks whose ratings Moody’s also warned it may cut soon include Pittsburgh-based PNC, the largest bank based in Pennsylvania and fifth-largest in the U.S.; and Citizens, which rivals PNC as one of the Philadelphia region’s dominant lenders.

Abbott Cooper, head of New York-based Driver Management Co., has invested in a string of Pennsylvania banks in recent years, and forced some, including the former Downingtown National Bank, to seek new owners. He is watching the impact of high rates and low office demand on the industry.

Cooper notes higher rates and low office demand are making business tougher for local lenders such as Republic First Bancorp, the largest bank still based in Philadelphia. But he says the squeeze is also putting bank deals on ice, and says he understands why Republic’s board is resisting South Jersey power broker George Norcross’ efforts to gain control.

Cooper talked about the future of bank investments, mergers, and acquisitions in an interview with The Inquirer. The conversation has been edited for clarity and brevity.

I was, but I’m mostly out. I have what you might call a rooting interest. Last year I nominated [former First USA Bank CFO] Peter Bartholow to his seat on the Republic board. I think the CEO the board then brought in, Thomas X. Geisel, has a tremendously hard job, to undo the damage [his predecessor] Vernon Hill caused.

Republic still has franchise value. They are still the biggest bank based in Philly. They have to chop wood and retool the business model.

But meanwhile they are having to spend a ton of money because [investors including] George Norcross sue so much.

Banks are very interested in merging. They can’t keep paying more for deposits than they can get in loans. But the rules are that, when they sell, they have to mark the entire loan book to market [and admit that the loans are worth a lot less than when they were made, reducing the bank’s value and forcing it to raise capital.]

And that makes it impossible to get bank deals done. Until the old loans [are paid off or written down] and new loans [at higher rates] come on the books to replace them, it’s very difficult to do bank mergers and acquisitions. Until that changes, there won’t be deals.

PacWest had a lot of issues in their loan books — but for accounting purposes they made themselves the acquirer. They did not have to mark down their loans.

At Fulton or any of these other banks, if the yield on their loans is 4% to 5%, you can only sell them at a discount, now that rates are higher. So anyone who wants to buy those banks, would need regulatory approval [at low valuations] and the deals would sit there for two years while they waited for it.

Banks realize the need for consolidation. The longer they can go [if they can hold on and keep lending at today’s higher rates], the markdown will be less. Then the dam will burst.

If they did away with this problem of purchase accounting, there’d be 100 mergers by Monday.