Corporate Valuation, Financial Services

February 22, 2016

2015: A Good Year for Banks

After weak broad market performance in the first quarter of the year and slow advances during the summer, U.S. stocks generally saw amplified returns in the fourth quarter of 2015. The largest banks (those with over $50 billion in assets) generally performed in line with broad market trends, but most banks outperformed the market with total returns on the order of 10% to 15% for the year (Figure 1).

2015-total-returns-bank Bank stock performance improved markedly in the fourth quarter as speculation following the FOMC’s September meeting suggested rate increases may begin in the fourth quarter. In mid-December, the FOMC met again and, after seven years of its zero interest rate policy, announced an increase in the target fed funds rate. The shift in monetary policy is expected to gradually improve strains on banks’ net interest margins and should be most apparent for banks with more asset-sensitive balance sheets, though community banks that may have made more loans with longer fixed terms or loan floors may experience some tightening in the short term. Bank returns generally averaged around 0% to 30% in 2015, though 17% of the U.S. banks analyzed (traded on the NASDAQ, NYSE, or NYSE Market exchanges for the full year) realized negative total returns. These included banks continuing to deal with high levels of NPAs; banks that are located in oil-dependent areas such as Louisiana and Texas; and some banks that have been active acquirers that missed Street expectations. On the other end, a few high performers in 2015 include merger targets as well as banks that have seen more success from acquisition activity (Figure 2). 2015-total-returns-number-bank One of the primary factors contributing to stronger returns in 2015 was loan growth. Banks with loan growth over 10% exhibited above-average returns, while those with slower growth tended to exhibit lower returns, with the exception of banks that shrank their portfolios during the year, though for these banks the higher returns likely reflected prior years’ underperformance that was priced into the stocks (Figure 3). 2015-total-returns-loan-growth Asset-sensitive banks also outperformed in 2015. While asset sensitivity is difficult to evaluate from publicly available data, we measured asset sensitivity by the proportion of loans maturing or repricing in less than three months from September 30, 2015, relative to total loans (both obtained from FR Y-9C filings). Limiting the analysis to publicly traded banks with assets between $1 billion to $5 billion reveals that the most asset sensitive banks returned about 16% in 2015, or 400 basis points more than less asset sensitive banks (Figure 4). 2015-total-returns-asset-sensitivity Though the smallest banks generally realized the highest returns in 2015, pricing multiples were strongest for banks with assets between $1 and $10 billion, which generally saw better profitability than the smaller banks. Year-over-year, pricing multiples generally remained flat from 2014 (Figure 5). 2015-pricing-overview Mercer Capital is a national business valuation and financial advisory firm. Financial Institutions are the cornerstone of our practice. To discuss a valuation or transaction issue in confidence, feel free to contact us.

Continue Reading

May 2026 | Revisiting Circle
Bank Watch: May 2026

Revisiting Circle

Ten months after Circle’s blockbuster IPO, the stablecoin landscape has matured from speculative enthusiasm into a more nuanced strategic reality for banks. While stablecoin adoption and transaction volumes continue to grow rapidly, the market’s evolution increasingly highlights a widening divide between large institutions positioned to participate in the ecosystem and community banks facing heightened deposit competition with fewer practical avenues for response.
Getting Into the Spirit of Valuation
Getting Into the Spirit of Valuation
When people talk about the “value” of a company, it is easy to assume there is one correct “answer.” In practice, there are many possible answers, and which one is the best answer depends on the purposes of the valuation, the user, and the facts and circumstances at hand. The Internal Revenue Service’s Revenue Ruling 59-60, defines fair market value “as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.” This is a great place to begin, but it is only the start.
April 2026 | The Community Bank Scale Tax: Three Questions for Boards in 2026
Bank Watch: April 2026

The Community Bank Scale Tax: Three Questions for Boards in 2026

Community banks came into 2026 in better shape than many expected. Margins and earnings improved, deposits were growing again, loan growth held up, and unrealized losses on securities moved lower. On the surface, the story looks better than a year ago. But that does not mean the pressure is gone.For many community banks, the next big issue is not only rates or loan growth. It is whether the bank is big enough, focused enough, and efficient enough to carry the higher cost of being a modern bank. That cost includes more than salaries and branches. It also includes technology, cybersecurity, vendor management, fraud tools, compliance, and the people needed to run it well. The FDIC’s Quarterly Banking Profile shows that despite better net interest margins, the largest drag on earnings is the cost of running a modern bank.That is where many board conversations should be headed now. The challenge is simple to describe: banking keeps getting more expensive, the cost base is harder to flex, and smaller banks do not always have enough scale to spread those costs out. This does not mean every bank needs to sell but it does mean every bank needs to be honest about what it costs to stay independent.1. Which costs are truly fixed, and which ones are self-inflicted?Every bank has unavoidable costs for non-revenue generating activities, such as for risk management, compliance, and cybersecurity. But not every cost deserves the same treatment.Some banks are carrying real fixed costs. Others are carrying years of built-up complexity: too many vendors, too many products, too many exceptions, too many legacy processes, and too many branches doing less work than they used to.The distinction between real fixed costs and the just-as-real complexity costs matters. If management treats every expense as untouchable, the bank usually ends up protecting complexity instead of protecting value. Boards should push on that point. Which costs are now part of the price of doing business? And which costs are there because nobody has made the harder cleanup decisions? Those are two very different problems.2. Are we big enough, or focused enough, to make the model work?Scale matters in banking, which is not a new point. The part that often gets missed is that scale does not always have to come from simply getting bigger. Scale can come from size. It can also come from focus.A bank with a strong niche, an efficient branch footprint, a manageable product set, and good expense discipline can often perform better than a larger bank carrying too much overhead. Bigger is not always better if the added size comes with added complexity.That is an important point for community bank boards. The question is not just, “Do we need to grow?” The better question is, “Do we have a business model that can carry the cost structure we have today?” If the answer is no, the bank has a few options: it can grow, it can simplify, it can narrow its focus, it can outsource more of what does not set it apart, or it can decide that another partner may be better positioned to carry the platform going forward.Recent examples show the range of choices. Community Bank used a branch purchase from Santander to build scale in a target market; Five Star Bank’s parent chose to wind down BaaS and refocus on its core franchise; Mechanics Bank exited indirect auto and later outsourced servicing of the run-off portfolio; and Susquehanna chose to partner with C&N for greater scale, resiliency, and efficiency. In sum, there are plenty of proven options and choices.But doing nothing is also a choice. And in many cases, it is the most expensive one.3. How much does the expense base hurt shareholder value?This is where strategy turns into valuation. A bank is not credited just for spending money on technology, compliance, or infrastructure. It gets credited when those investments lead to better performance, better returns, better customer retention, better growth, and better risk control.If the bank carries a heavy cost base without a clear payoff, that usually shows up in weaker earnings and lower returns. Over time, it can also show up in a lower valuation, which matters even if the board has no near-term interest in selling. Valuation is not just about a sale; it is a scorecard on the strength of the franchise. A bank with strong returns and a clear strategy usually has more flexibility. A bank with weaker returns and too much complexity usually has fewer options.Timing matters. Banks have more breathing room now than they did a few years ago when interest rates increased sharply, with strong earnings and clean asset quality, and that is a good time to revisit strategic and technological plans.The issue in 2026 is not simply whether a community bank can remain independent. The issue is whether it can earn that independence after paying the ever-growing cost of being a modern bank.The banks that will stand out are not necessarily the biggest banks. They are the ones that know what they do well, run a cleaner model, and make sure their cost base supports the franchise instead of weighing it down. For some institutions, that will support long-term independence. For others, it may lead to a different conclusion.Either way, the discussion should start with a hard look at the expense base. In a lot of cases, the pressure to sell does not begin with a buyer showing up. It begins when the math stops working.About Mercer CapitalMercer Capital is a nationally recognized valuation and advisory firm serving financial institutions including banks, credit unions, fintech companies, insurance companies, investment management firms, financial sponsors, and other specialty finance firms. Mercer Capital regularly assists these clients with significant corporate valuation requirements, transactional advisory services, and other strategic decisions.

Cart

Your cart is empty