Mauldin & Jenkins Banking Newsletter  |  September 2019
To Sell or Not To Sell?
Evaluating Return on Investment Options for Community Banks
Jim Vaughn, CPA | Mauldin & Jenkins, LLC

Community banks often make attractive acquisition targets, which leads board members at these institutions wondering if it’s time to put the bank on the market or accept an offer currently on the table. Observing the sales price of other financial institutions can make selling an appealing prospect at first glance. However, responsible stewardship mandates a careful analysis of selling versus continued ownership in terms of overall investment value before reaching a final decision.

Board members at community banks often become enthusiastic about selling when they see the compelling figures from transactions in the sector:

Average Price to Book (%) – US Financial Institutions M&A Summary – 2018          165.4  [i]
Median Price to Earnings (x) – US Financial Institutions M&A Summary – 2018         25.3 [ii]

Prioritize specifics over generalizations
Average selling prices don’t tell the whole story. It’s important to approach any potential sale with a clear understanding of the factors that drive pricing within the banking sector. The bank’s financial position plays a meaningful role in pricing, with consideration of historic earnings and access to adequate capital affecting the selling price either positively or negatively.

Geography also has a significant impact on the price of an individual institution. Does the location offer growth potential through proximity to a large pool of desirable banking customers? Is it convenient to enter and exit relative to main thoroughfares and traffic flows? How many competing institutions are nearby? And, as with any business, relative brand strength and reputation within the community the bank serves factor into the sales price as well.

In addition to an awareness of pricing factors, board members should adopt a realistic expectation with regard to potential sales proceeds that result from a transaction. Just listening to the talk of an investment banker at a convention can create a perception that the selling price will deliver an exceptional financial windfall. These conversations frequently omit mention of all the associated transaction costs that reduce the transaction pricing and, therefore, net cash to investors.   After deducting taxes and investment banker fees from the total, the price often seems less thrilling for a typical community financial institution.

Consider too the reinvestment and liquidity risks of taking stock or cash in a transaction, and how the sale may affect the community and employees when assessing potential financial gain. Reinvestment risk is evaluating a replacement investment available in the marketplace that can provide a similar rate of return and risk profile to that of the current investment in the community bank.  The liquidity risk results if the selling institution takes stock in the acquiring institution. Is the stock liquid enough that an investor can put their shares on the market and sell them?  Some stocks are illiquid or have very little volume and a large sales transaction could have a significant negative impact on the stock price.  If the community bank is a large employer in the local economy and plays a significant role with community philanthropies, there can be a significant local impact if an acquiring institution is much larger or does not have the same level of giving spirit. 

Compare return on equity for selling versus holding
Another element to keep in mind is the bank’s return on shareholder equity in relation to the returns that might be generated by investing these funds in a publicly traded stock. The difference in investment return over time may not support the argument for selling, especially in light of the higher level of risk that comes with a sale, transactional costs and impacts to community and bank staff. It is notable that the average return on equity (ROE) for all FDIC-insured institutions outperforms the market overall and the national bank in the example below.

Return on Equity (ROE)                                                                      11.98  [iii]
Wells Fargo (WFC)                                                                              5.644 [iv]
US Stock Market (Russell 3000 Index)                                              10.19   [v]

Again, the individual performance of one community bank can’t be surmised from the averages but definitely merits an in-depth analysis and comparison to alternate investment options.

Always seek professional guidance
The decision to sell demands a thorough analysis of multiple interrelated factors. Bank board members and financial sector valuation specialists should work together to identify the path of maximum value, determine appropriate strategies and facilitate optimal outcomes. The experienced professionals at Mauldin & Jenkins can help guide you through the process and offer unbiased information to help you move forward, whatever your ultimate decision.

[i] S&P Global Market Intelligence for all deals in 2018
[ii] S&P Global Market Intelligence for all deals in 2018
[iii] FDIC SDI--All Institutions-National for the year ended December 31, 2018
[iv] S&P Global Market Intelligence for 10-year period ended 8/15/2019--Annual Average Return 
[v] For period ended June 30, 2019 (5 years average annual return)

Ron Mitchell, CPA
Banking Practice Leader

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Jameson Miller, Director

Jameson Miller, CPA, CISA
is a Director in the Chattanooga, TN office and has been with Mauldin and Jenkins since graduation from the University of Tennessee at Chattanooga. He currently leads the firm’s Information Systems and Cybersecurity practice. For over 12 years, Jameson has provided audit services to public and private entities throughout the Southeast. Jameson’s experience includes audits of general controls, application controls, and cybersecurity risk management programs.  He also has extensive experience with Sarbanes Oxley, SSAE18 System and Organization Controls (SOC) Audits, and Gramm-Leach-Bliley Act (GLBA) compliance program implementation, testing, and reporting.  His technical expertise includes performing vulnerability assessments and penetration testing of information systems using both technical and social engineering techniques.  Further Jameson has:

  • Maintained current and relevant information technology and financial accounting continuing professional education credits (CPE);
  • Obtained the AICPA’s “Cybersecurity Advisory Services” and “Blockchain for Accounting and Finance” Certificates;
  • Presented a 2018 CPE Webinar for the Georgia Governmental Financial Officers Association (GGFOA) members entitled, “Cybersecurity Trends and the AICPA’s Cybersecurity Risk Management Program";
  • Presented a 2018 CPE breakout session entitled, “What is Blockchain and Why Should I Care?” for the GGFOA’s Annual Conference;
  • Presented a 2019 session for the Georgia Society of CPA's Non-Profit conference, “Technologies Transforming Accounting.”

Jameson is a member of the AICPA, the Tennessee Society of Certified Public Accountants, and ISACA (f.k.a. Information Systems Audit and Control Association).  In addition, Jameson enjoys volunteering as Secretary and Treasurer of the Board of Directors of the Cumberland Trails Conference, a 501(c)3 non-profit organization charged with completion of the hiking trail through Tennessee.  Jameson is a licensed Certified Public Accountant with the state of Tennessee and a Certified Information Systems Auditor through ISACA.

Jameson resides in Chattanooga, TN with his wife, Ashley, and son, Fox.  They are avid outdoor enthusiasts, and in their spare time enjoy hiking and backpacking. Together they have completed over 460 miles of the Appalachian Trail (Springer Mountain, GA to Damascus, VA), and over 200 miles of trails within the Great Smoky Mountains National Park.

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