The economic environment that has spawned hyperactive merger and acquisition activity among Connecticut's regional banks likely will spread to the state's community banks in 2011, industry experts said.
And that could produce a "feeding frenzy" that results in deals affecting nearly one in five banks in the state.
One key is a recent wave of second-step conversions, a legal maneuver that allows banks to float new stock offerings and generate swaths of cash. Combined with a slumping economy and increased pressures stemming from new financial regulations, the environment is right for as many as a half-dozen deals this year, experts said.
That would be a major shakeup in the state's banking landscape. Connecticut is the home to 54 banks, with most smaller than $1 billion in assets.
"I think 2011 will shape up to be an active year for a banking sweepstakes in Connecticut," said John Carusone, president of the Bank Analysis Center, a consulting firm in Hartford.
Carusone said Connecticut banks remain relatively healthy but there are still many economic and regulatory pressures that could create opportunities for stronger lenders to prey on their weaker brethren. And it will likely be cash-laden community banks — some of which have just converted into fully public companies — acquiring other small banks, rather than any regional or national players trying to get in on a deal.
Rockville Bank, for example, is in the process of reorganizing into a fully public company, a move that could allow the bank to raise as much as $170 million.
The bank's incoming CEO, William H.W. "Bill" Crawford IV, has already expressed a desire to more than double the size of the $1.6 billion bank, possibly through acquisitions.
In a similar move, SI Financial Group Inc., the parent of Savings Institute Bank and Trust Co. in Willimantic, recently completed its conversion to a publicly owned bank, allowing the company to raise $53 million.
Rheo A. Brouillard, SI's CEO, said the company, with $880 million in assets and 21 branches mostly in eastern Connecticut raised the capital because it has been growing rapidly in recent years.
And Brouillard said he's interested in expanding that footprint further with new branches or acquisitions.
"We are certainly interested in growing," Brouillard said. "I'd suspect the market for M&A will pick up, and not just in Connecticut."
Naugatuck Valley Financial Corp. also recently announced plans to sell a 60 percent stake of itself to the public. The parent company to Naugatuck Valley Savings and Loan has already hinted that it is in the market for an acquisition after its failed attempts last year to acquire Southern Connecticut Bancorp for close to $19 million.
That deal fell apart after failing to win regulatory approval.
Meanwhile, New England Bancshares, which has been active in M&A activity in recent years, including acquiring Cheshire-based Apple Valley Bank & Trust Co. in 2009, announced last week that it was sitting on $45 million in cash.
All of this activity will likely set the stage for intense competition as banks look to deploy newly acquired capital in a way that gives investors the biggest bang for their buck.
And, in this economy, it can be more effective to produce increased earnings through acquisitions rather than organic growth, Carusone said.
William Bouton, a lawyer at Hinckley, Allen & Snyder LLP in Hartford who specializes in bank M&A transactions, said many of the pressures facing Connecticut banks could lead some management teams to decide that it is no longer fruitful to go it alone.
The continued high levels of unemployment and foreclosures are putting pressure on bank's loan portfolios and forcing them to set aside larger reserves to cover bad loans. That negatively impacts the amount of capital they have at a time when regulators are pressuring banks to boost reserve ratios above normal levels to hedge against the economic climate, Bouton said.
Banks also are bracing for potentially more rigorous and costly compliance exams and higher capital standards as the Dodd-Frank Act continues to be implemented.
At the same time, new federal restrictions on overdraft fees have taken a bite out of many Connecticut banks' income, and a new proposed cap on the "swipe fees" banks charge retailers and restaurants for accepting debit-cards will put further pressure on their bottom lines.
"I think there's going to be a lot more consolidation," Bouton said. So which banks are potential acquisition targets?
Carusone said any publicly-traded bank with assets below $500 million will likely have a bull's eye. That could include lenders like the Connecticut Bank and Trust Co. in Hartford, The Simsbury Bank & Trust Company, and Southern Connecticut Bancorp.