I had a chance earlier this week to sit down and chat with Robert Hendershott of Context BH Capital. Context is a fund the employs an event-driven, long/short investment strategy focused on the community and regional banking sectors. They invest in banks that are acquisition targets of aggressive consolidators and capturing takeover premiums in advance of acquisition announcement and select merger arbitrage transactions post-acquisition announcement.
This firm was built from academia, not Wall Street. Mr. Hendershott was a professor at Santa Clara University where he wrote several papers about the likelihood of banking consolidation once interstate banking regulations were relaxed. He realized that there was money to be made here and in 1998 he became an advisor to a hedge fund and eventually struck out on his own. In 2010 he started managing individual separate accounts and started the fund in 2012.
Mr. Hendershott pointed out that consolidation has been going on for a long time. When all this started in the late 1980s and early 1990s, there were over 16,000 banks in the United States. Today we are down to just about 6,000. He also noted that the number of publicly traded banks has stayed about the same over this time. The banks that have disappeared via M&A have been small private banks for the most part. He thinks that the thousands of smaller banks in the US are an endangered species right now.
He is cautiously optimistic about community banks in 201. If all the expectations of lowered regulations and tax cuts coupled with a growing economy and higher net interest margins today’s prices will be an excellent entry point. He is worried about the timing and form of all these changes and exactly who changes are made to banking regulations and tax code ...