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M and A activity high point for resilient financial institutions

May 16, 2014

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Here at Clark Schaefer Hackett, we understand that the Great Recession and a fluctuating economy have taken their toll on financial institutions across the country, impacting the profits, quality of assets and strength of banks everywhere. However, we noticed amid recent first quarter earnings reports several positive signs.  As a whole the industry profits are up with provisions for loan loss decreasing.  We also note another positive sign has emerged – burgeoning merger and acquisition activity.

The ability to consolidate banks in order to remain solvent amid a challenging economic climate is extremely important for the overall health of financial institutions throughout the U.S. With that being said, there remains a priority to properly value any bank prior to a merger, in order to quickly ascertain asset and management quality. Financial institutions are part of a highly regulated industry, and there is a plethora of general data available via agencies such as the Federal Deposit Insurance Corporation and the U.S. Securities and Exchange Commission. Even so, the ability to perform more in-depth bank valuations is crucial for further growth in M&A among financial institutions. To help shed some light on the current climate, here are a few trends we wanted to share:

Mergers bolster big banks
As the U.S. economy continues to recover following the Great Recession, two large financial institutions have turned to mergers as a way to bolster their revenue streams and shore up their earnings.

According to The Wall Street Journal, Goldman Sachs Group Inc. and Morgan Stanley have turned away from the traditional trading desks and instead are looking to mergers and investment banking to turn a profit. Both banks reported a high net income during the first quarter in 2014.

Ruth Porat, Morgan Stanley’s chief financial officer, told the media outlet that the increasing deal activity is incredibly encouraging, and is something that the financial institution has been anticipating for a long time.

The growing focus on mergers in the industry is in part attributed to changing federal regulations. Banks have been asked to hold more capital against risky trading assets, so in some cases the smartest course of action is to look toward other avenues of revenue. In addition, a surging economy has also led to increased business and consumer confidence.

“Businesses that had been modestly upbeat in the recent past have more confidence as they see their own businesses improve as the economy improves,” RBC analyst Gerard Cassidy told The Wall Street Journal.

Community banks find strength despite consolidation
While looking through recent data, we realized that the big banks of the industry aren’t the only ones finding success in today’s economy. In fact, a number of smaller community banking institutions have found ways to remain resilient even while financial institutions consolidate.

According to new information released by the Federal Deposit Insurance Corporation, community banks are still figuring out how to thrive in a tough climate – and many have even grown over the past several years. The FDIC study found that the number of banks with assets between $100 million and $10 billion have increased since 1985. For banks with assets between $100 million and $1 billion, the rate of growth was 7 percent since that time. For community banks with assets between $1 billion and $10 billion, that figure was 5 percent.

“The FDIC study clearly demonstrates the strength and resilience of the community bank sector and supports the conclusion that community banks will continue to play a vital role in the financial system of the United States for the foreseeable future,” FDIC chairman Martin Gruenberg said in a statement.

Above all else, the hardy nature exhibited by financial institutions throughout the country is good news for the U.S. economy as a whole. Large commercial banks have identified new ways to bolster revenue, and smaller community banks have also found solutions to withstand the fluctuating and challenging nature of the industry. As a result, you may experience some positive gains for your bank as well.

You’re in an industry that deals with a myriad of regulations, compliance issues and other considerations. All of these factors can make life complicated if you have to go it alone. Instead, our industry experts at Clark Schaefer Hackett can help answer any of your questions and ensure you have the tools needed to grow and prosper.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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