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Preparing for transition
Succession Planning Important for Shareholders as Bank M&A Activity Increases
Community banks saw a significant decline in merger and acquisition activity throughout the country when the economic recession began in 2007. With nearly 200 mergers and acquisitions in 2013 — almost double of that in 2011 when there were only 108 transactions — it appears as though the pendulum has begun to finally swing in the other direction. Forecasters expect this trend to continue further into 2014.
Many small community banks now must consider choosing between employing staff to assist with the new compliance requirements, selling the bank, or outsourcing certain functions to a third party. After dealing with increased regulatory compliance pressure, many bank owners tell us they are now looking to sell their bank to capitalize on the improving market.
Selling as a viable option
Since 2007, 495 banks have failed. While the number of troubled institutions is declining, 515 banks remain on the Federal Deposit Insurance Corporation’s (FDIC) “problem list” as of September 30, 2013. During this time, many banks inadvertently moved away from actual lending as they needed to focus their time on addressing problem assets.
Many bank owners are nearing retirement age, and tell us they have become fatigued after dealing with impaired loans, troubled debt restructurings, charge-offs, and foreclosures over the last five years. They are not interested in filling the loan pipeline and generating the growth necessary to achieve their desired return, leaving the option of selling their bank as the most likely exit strategy.
In addition, more than 50 new regulations have been issued since the creation of the Consumer Financial Protection Bureau (CFPB) as a part of the Dodd-Frank Act in 2010, and more changes are looming.
The industry is still a long way off from the pre-2007 transaction prices of two to three times an institution’s book value, but prices are starting to rebound, making selling an attractive option.
In 2014, five transactions have taken place involving banks with assets between $250 million and $1 billion, selling at an average price of 1.79 times book value. This represents a significant increase over the last few years, when many transactions closed at book value or less. The increase in these transaction values has definitely attributed to the flurry of activity throughout 2013 and so far in 2014.
Creating a succession plan
An increase in favorable sale prices has led to an uptick in mergers and acquisitions, as the sellers who’ve stuck it out through the downturn are now motivated to exit the business. As more shareholders begin to sell their ownership in community banks, they are wondering how to manage the proceeds from the sale.
Many shareholders are looking to incorporate the proceeds into their retirement plan, but say that they have not thought much about retirement and do not have a succession plan in place.
The first step they should take is creating a thoughtful plan for retirement based on their unique goals. Then they can build an investment strategy focused on achieving those goals with appropriate risk and return considerations for their situation.
Before selling their shares, shareholders should ask themselves the following questions:
- What is my vision for retirement?
- Do I have adequate resources to make my retirement vision a reality?
- What strategies should I be considering to maximize my chances of providing for my retirement vision?
How we can help
Many banks are still figuring out how to navigate the changing regulatory environment. Those that have decided that now is the time to sell their shares should work with a financial advisor to assess how to optimize their proceeds from the transaction. CliftonLarsonAllen can assist with the following services: