Seven Reasons Why Banks Are Selling
December 2, 2014 9:00 AM
The investment banking firm Sterne Agee & Leach recently studied 16 bank mergers that involve sellers with market capitalizations of $100 million to $5 billion. The sellers share a number of characteristics in common. Here are seven important ones.
Heavy Insider Ownership
Insiders typically officers and directors own more than 20% of the common stock at nearly 70% of the sellers. The right premium can often persuade insiders to take their chips off the table.
Weak ROA
Roughly two-thirds of the selling institutions had an average three-year return on assets of less than 0.8%. Also, half of the banks posted year-over-year decreases in ROA.
Substandard ROE
The average three-year return on equity at nearly 70% of the sellers failed to top 10%. Again, half of the selling institutions suffered year-over-year ROE declines.
Aging Executives
Half of the sellers are led by a CEO who is older than 60 and possibly looking to retire. Often, succession is the issue that prompts the sale.
High Costs
Nearly 60% of the sellers posted three-year average efficiency ratios that exceeded 65%. A strong ratio is considered to be 55% or lower.
Tight Margins
Three-fourths of selling banks had net interest margins of 3.60% or less in the last 12 months, cutting into net interest income.
Fee-Starved
Roughly 70% of the sellers generated less than 20% of their revenue from fees, putting even more pressure on management to stabilize margins and cut costs.
