Slideshow Seven Reasons Why Banks Are Selling

Published
  • December 02 2014, 9:00am EST
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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.

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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.

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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.