And in some people’s minds, there may never be a better time to buy a bank.
In a typical year, there are about five to seven bank mergers in Colorado. This year, just one deal is expected to close.
But more deals are anticipated because even among healthy banks, increased regulatory pressure is giving bankers pause. At the same time, some smaller, weaker banks will be forced to sell as more of their commercial real estate loans default.
For the moment, sellers are holding out because of depressed prices. Buyers are reluctant given the volatility in loan portfolios. But those very reasons also could help fuel deals in coming months.
When healthy banks start shopping, oftentimes their most logical choice is struggling banks, which are likely to have lower valuations.
Before the recession, valuations were 2 to 2.5 times book value. Now valuations are at 1 to 1.25 times book value, said Michael Hobbs, managing director of St. Charles Capital, an investment banking firm in Denver that handles mergers and acquisitions.
In the Pikes Peak region, a few banks could be potential targets. Several are under regulatory cease-and-desist orders, including Rocky Mountain Bank & Trust, Peoples National Bank, Park State Bank & Trust, Academy Bank & Trust and Pikes Peak National Bank.
But struggling banks aren’t the only potential targets.
Some family-owned banks — Pikes Peak National, for example — also could soon decide the time is ripe to sell. That’s because taxes are expected to increase, which outweighs any benefit gained by waiting for valuations to improve.
“They don’t want to try to eke out a little more return by waiting for valuations to (improve),” Hobbs said. “So now is as good a time as any to sell the bank and invest the capital elsewhere.”
But, again, for those willing to pull the trigger, purchases prices are at historic lows.
Earlier this year, Oklahoma-based First Commercial Bank, which has a branch in downtown Colorado Springs, acquired two branches of Liberty Bank Group in Denver, said Jack Kerr, market president for First Commercial Bank Colorado.
The bank bought the branches’ deposits for half what they would have cost two years ago, he said.
“In the past 20 years, never have I seen the opportunity for expansion at a fraction of the cost,” Kerr said.
“You don’t want to sell a bank right now,” Kerr said, “but you sure want to buy one.”
That’s occurred to plenty of other bankers, too.
“We’re considering it. Our hope is to buy a bank or branches that make sense for us,” said Steve Ingham, Colorado market president of Kirkpatrick Bank, which is based in Edmond, Okla.
He said his company would be interested in a bank that does a lot of commercial lending, but also has a higher-end retail presence, with a similar culture to Kirkpatrick’s, so that the management teams could “blend” together after the merger.
Ingham has high expectations that Kirkpatrick will find good acquisition targets.
“Over the course of the next two years in Colorado, we’ll see some unprecedented opportunities,” he said.
Another banker waiting in the wings is Mike League, president of Colorado Springs-based 5 Star Bank.
After selling a credit loan portfolio in April, 5 Star now has a 44-percent risk-based capital ratio, a measure of its liquid reserves. Typically, banks have about 12 to 20 percent risk-based capital ratios.
“Our strong capital base positions us to capitalize on any promising asset acquisition opportunities — distressed or not distressed,” League said.
Not that 5 Star will buy just any bank.
“In this environment, we’d be very cautious as to what we’d be acquiring,” he said.
Although bank devaluations make this an advantageous time to acquire assets, there’s still some uncertainty in the economy, he said.
“It’s a question of, have we really reached the bottom of valuations for loans secured by real estate?” League asked. “It’s a time to be prudent and do your due diligence by analyzing the assets or loans of failed institutions — because there’s a reason they failed.”
And more banks will fail before all is said and done. So far this year, bank failures have surpassed last year’s levels.
Which, in part, is why Don Childears, president of the Colorado Bankers Association, expects M&A deals to return to more normal levels next year.
He anticipates about a half-dozen bank acquisitions and mergers, primarily between community banks, along with a number of branch acquisitions.
The Dodd-Frank Reform Act, Childears said, will help drive some of the deal-making.
That’s because the legislation, passed this summer by Congress, creates at least 243 new regulations that will constitute up to 20,000 pages of new rules, he said.
“Larger banks (may) find this overwhelming, but smaller banks often view this as impossible to comply with,” he said.
Hobbs, at St. Charles Capital, agrees.
“We are in dialogue (about potential sales) with banks on a daily basis,” he said. “With every passing day, the winners and losers are starting to be more defined.”
“We will look back 10 years from now and say this was absolutely a game-changing event,” Hobbs said. “Some dropped out of the banking industry, while others exploited the opportunity. What an unbelievable time to expand.”