Determining which bank will be the next to sell is a favorite guessing game among investors and analysts. A sudden stock price spike, an alarming drop in deposit share, or a crippling enforcement order could all be signs of an imminent takeover.
But a new report from Ferris, Baker Watts Inc. aims to eliminate some of the guesswork.
The Baltimore investment bank's analysis of deals across the country for the last three calendar years found that many selling banks and thrifts have five characteristics in common. And out of roughly 1,400 publicly traded community banks and thrifts, Ferris Baker Watts' team of analysts identified 29 that met all five criteria.
The smallest on its list of takeover prospects is the $52 million-asset University Bancorp Inc. in Ann Arbor, Mich., and the largest is the $3.1 billion-asset Banner Corp. in Walla Walla, Wash.
Millennium Bankshares Corp. of Reston, Va., also made Ferris Baker Watts' list, which was presented at an investor conference the firm hosted in Hershey, Pa., last week.
Carroll C. Markley, Millennium's CEO, said that though the $425 million-asset company thinks of itself as a buyer and not a seller - it announced in June that it was buying the $125 million-asset Albemarle First Bank of Charlottesville, Va. - it would never rule out a sale.
"Our plan is to grow through branching and acquisitions," Mr. Markley said. "But if someone were to call me about a deal, I have a fiduciary responsibility to talk to them. It all depends what's out there."
Ferris Baker Watts' analysis found that banks are more likely to be sellers if they are less than 20 years old; have chief executives either under 45 years old or between 61 and 70; have generally have below-average returns on assets; have below-average returns on equity; and have higher-than-average efficiency ratios.
Henry Coffey, an analyst at Ferris Baker Watts, said that he and his colleagues decided to analyze deal criteria going back three years because they all had assumptions about what makes a buyout target but had no proof to validate those assumptions.
"We have a lot of prejudiced views about acquisitions between us, and we wanted to verify them. And we eventually found out that some of our views were correct and some were not," Mr. Coffey said.
One assumption that was backed up by the analysis was that inefficient banks sell. According to Ferris Baker Watts' data, which drew from statistics from SNL DataSource, the average efficiency ratio of all banks that sold in 2004 was 72.91%, well above the industry average of 62.93% for banks last year.
The research also confirmed the theory that banks with a record of sluggish performance tend to sell more often, since they cannot make significant improvements on their own. According to the report, the average ROE for banks that sold in 2004 was 5.95%, while the average ROA was 0.6%. Last year those figures were 10.07% and 0.9% for all banks.
One theory was disproved: that banks in fast-growing markets are worth a lot more than banks in slower-growing ones. In the Middle Atlantic the analysts looked at the divide of Intertsate-81 (which cuts through the middle of Virginia and Pennsylvania), and found that the deposit premiums and price-to-equity ratios paid for banks both east and west of the Interstate were nearly the same.
"I had always preached [to investors] to stay east of I-81 and be very cautious about crossing the line, because I was concerned of the terminal value of those banks," Mr. Coffey said. "But there is no effect of that kind."
The analysis also showed that young CEOs, specifically those under 45, are more inclined to sell than middle-aged CEOs and that those over 70 rarely sell. The most common age range for CEOs to sell was 61 to 70.
Mr. Coffey said that the younger bankers are more apt to sell because they are not as attached to the bank and see it more as an investment. As for the older CEOs, they often seek a sale because they are approaching retirement and have no clear successors in mind.
As with the CEO, a bank's age is often a factor in its inclination to sell. Mr. Coffey said that banks under 20 years old - particularly those 10 and younger - are more likely to sell than more established banks because they are more likely to have hit a growth wall and might need an out. Ferris Baker Watts' analysis found that 60% of all banks and thrifts that sold between 2002 and 2004 were less than 20 years old.
Matthew Schultheis, the Ferris Baker Watts analyst who initiated the study, said that the region with the most banks fitting the seller profile was the Midwest, with nine. Six were from the Middle Atlantic and only two were from the West.
Mr. Schultheis said that while his firm's criteria are relevant, one should not read too much into the list. He pointed out that other analysts assembled similar lists using their own criteria "and generally what you see is you get a list of 20 banks and, in the next year, three of them sell," he said. "So statistics don't tell the whole story."
