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Preparing for transition
Are We Poised for a New Wave of Community Bank Acquisitions?
Since the economic meltdown of 2008, there have been very few sales of healthy community banks. This is due to a number of factors, including a lack of confidence on the part of buyers, concerns about loan quality, and bank owners not wanting to sell their businesses at a price they consider very low.
Financing was also difficult to find after the market for trust-preferred securities disappeared and bank stock lenders became nervous. Finally, buyers could satisfy their appetites by acquiring failed banks from the Federal Deposit Insurance Corporation, since it provided significant financial support and ongoing guaranties that minimized the risk to the buyers.
Increase in sales?
My colleagues and I are predicting an uptick in the number bank sales. We have already seen a slight increase in the number of completed sales, and the sale prices have also slightly increased in the past few years.
Investors are interested in buying banks because they see an opportunity to expand their business and capitalize on fairly low sale prices. Financing is available again, and bankers are seeing the advantages of economies of scale.
Since the number of failed banks is decreasing, investors would benefit from focusing on purchasing healthy banks instead of waiting for a bank failure. In addition, no charters for new banks have been issued by any state or federal agency in the past two years. Therefore, investors must acquire existing banks instead of trying to get a charter for new ones.
Sellers are less enthusiastic than buyers right now. Many are still uncertain about the value of their banks. They understand that the prices paid prior to 2007 are unrealistic in today’s environment, but they don’t necessarily believe that bank prices will remain at the relatively low levels for an extended period of time.
We suspect the number of banks available for sale will increase in the future. Simple fatigue may drive some of the activity. Some bankers are tired of dealing with the hassles of the banking business, such as the challenges of addressing credit quality and regulators. They see even more hurdles on the horizon, including a never-ending parade of new regulations, low loan demand, declining margins, and a demand for increased capital levels. Overall, it is difficult to create acceptable earnings and return on investments in today’s environment.
Two different demographic forces may drive some of the selling activity. First, some bank owners may have wanted to retire and sell their bank over the past five years. However, the weak economy and low bank prices may have delayed those plans. This group could now be looking to restart their delayed retirement plans. Second, 1,578 new banks were chartered between 1998 and 2007. Some owners expected that they would hold the bank stock for about 10 years. Many of these owners may now be looking to convert their investments back into cash as they look to retire or reallocate their investment funds.
Although we don’t believe that prices or activity levels will rise to those seen before the recession, we expect that a new equilibrium will develop for the supply and demand of bank sales.