Up to 20 banks in state viewed as ripe for sale in coming years
Posted on Sunday, May 4, 2008
Experts anticipate that as many as 20 Arkansas banks will be sold in the next few years because of declining earnings, aging ownership and an overabundance of financial institutions.
“This is time for the big boys to try to gobble up some of the smaller [banks ],” said Brad Held, owner of KBH Bank Consultants in Little Rock. “There are some opportunities out there.” Held and Randy Dennis, president of DD&F Consulting Group, a bank consulting firm in Little Rock, expect smaller, rural banks to be likely targets. Dennis said banks with less than $ 200 million in assets will be the most likely to sell.
“I would say maybe 15 or 20 banks in Arkansas could be sold in the next two or three years,” Dennis said.
Earnings are down among Arkansas-based banks, which had net income of almost $ 415 million in 2007, down more than 22 percent from $ 535 million in 2006.
The big difference in the two years was the performance of ANB Financial in Rogers, which was hit with a sanction by the Federal Reserve in January because of its lack of financial soundness. ANB Financial lost $ 81 million last year, compared with earnings of $ 29 million in 2006.
“[Banks ] look at two things [in making an acquisition ], a multiple of earnings and a multiple of book value,” Held said. “When earnings are down, it just reduces the value [of the bank ] based on the earnings performance. So there are more opportunities now than when earnings are better.” In addition to banks’ financial problems, Dennis said, owners and directors of many banks are nearing retirement age.
“The graying of the baby boomers will have a huge impact on turnover in the banking business,” Dennis said. “The increased regulation, especially in the compliance area like the Bank Secrecy Act and the Patriot Act, will result in other people just throwing up their hands. More and more older folks are less likely to want to endure that.” The number of Arkansasbased banks dropped from 170 in 2003 to 150 at the end of last year. Most of those banks were sold. But the drop also includes mergers of bank charters — such as the consolidation of Arkansas Diamond Bank in Glenwood and Diamond State Bank of Murfreesboro, which had similar ownership and were merged into Diamond Bank of Murfreesboro.
“There is still an overabundance of commercial banks out there,” Held said.
There were two acquisitions that closed in the first three months this year. Home BancShares Inc. of Conway paid about $ 26 million to buy Centennial Bank of Little Rock, and Farmers and Merchants Bankshares Inc. of Stuttgart bought Perry County Bancshares of Perryville for about $ 23 million, according to SNL Financial of Charlottesville, Va.
There was one other announcement of a purchase by an Arkansas bank in the first quarter. First Community Bancshares Inc. of Batesville said it would pay about $ 3 million to buy Goodman State Bank in Goodman, Mo., according to SNL Financial.
And on Thursday, Searcybased First Security Bancorp announced that it had agreed to buy Union Bank of Benton, which has assets of $ 228 million.
John Allison, chairman and chief executive officer of Home BancShares, said last month during a conference call that he has seen “strange things” recently that he hasn’t seen in his 40 years in business.
“What history may record is some of the most stressful financial times in many, many decades,” Allison said. “Billions [of dollars ] in charge-offs, record foreclosures, locked up credit markets, oil over $ 110 a barrel, a major economic slowdown, discussions about whether we’re in a recession, banks having to raise billions of dollars in new capital in order to maintain strong capital ratios, major drops in interest rates and trashing of the U. S. dollar.” The environment is ripe for purchases and Home Banc-Shares is preparing for that, Allison said. Allison compared the climate to that of the late 1980 s and early 1990 s when the federal government assisted in the sale of hundreds of financial institutions.
“This company is very conservative with almost $ 300 million in capital and $ 100 million in excess capital in an environment where we think there are going to be lots and lots of opportunities,” Allison said of Home BancShares. “We’re looking, and our phone is ringing. There are several banks in trouble. I think there may be some failures, and this company is ready to move if there is an opportunity for us.” J. Thomas May, chairman and chief executive officer of Simmons First National Corp. in Pine Bluff, said last month that his bank also is considering expansion outside Arkansas.
“Our management team is well into the process, not only to developing the overall strategy, but also looking at certain markets with growth potential larger than the markets we’re currently in,” May said during Simmons’ quarterly conference call. “We’ve identified the markets and even identified the various locations. But we have not gone any further than that.” So many banks are in financial trouble nationally that negotiating deals in the near term may not be easy, said Robert Goad, a mergers and acquisitions analyst with SNL Financial.
“There are definitely opportunities out there to buy,” Goad said. “These troubled banks need a capital infusion or someone to come in and save them. But on the flip side of that coin, the mortgage crisis has not been selective on just a few banks. Even the biggest banks in the country, like Citigroup and Bank of America, down to the smallest local banks, have had problems. Everyone’s stock prices are dropping based on mortgage [troubles ].” With the stock price of many publicly traded banks falling, banks that want to make a purchase with stock would pay a lot more of their own stock than they would have a year or so ago, Goad said. In other words, banks’ buying power is less than it used to be, he said.
And buying with cash is not simple now, either, Goad said. Banks that normally could pay cash are concentrating on shoring up their capital reserves, he said.
There was a dramatic dropoff in bank sales in the first quarter this year, Goad said. Only 33 sales were announced nationally in the first three months, according to SNL Financial.
Dennis said businessmen who have never been in banking may be among buyers of small Arkansas banks.
“Banking is still a very desirable business,” Dennis said. “Because where else can you put your money where the federal government comes in every 18 months and checks on it for you. You want your bank watched after and be sure you’re profitable. And the regulators have the same interest as you do.”
FEEDBACK:
Something to say about this topic? Submit a Letter to the Editor online
