Bowman Gives Keynote at Community Banking Event

Fed Governor Michelle Bowman spoke at the opening of the “Community Banking in the 21st Century” Conference sponsored by the Federal Reserve this week.

She primarily discussed takeover activity in the community banking sector.

She noted that far fewer small banks exist since the credit crisis.

When examining the chief drivers of consolidation, she said: “To better understand what is happening with these institutions, we looked at several potential differences between small community banks that have been acquired and those that were not.”

Was it the smallest community banks, or those with the smallest markets, that are the top targets?

Fed Governor Michelle Bowman: Not What You’d Expect

It turns out that the key difference between these banks was not their geographic reach or their size, but rather their profitability.

“We find that small banks that were acquired by another institution were, on average, about the same size and geographic scope as other small banks but they were less profitable,” she said. “This fact challenges the notion held by some that small scale or operating in a very limited geographic area is a disadvantage and it shows that many small, locally-focused banks are performing well in a changing and challenging marketplace.”

How Bowman Aligns with Our Strategy

In closing, she returned to the question of what we know and what we would like to know.

“We know that consolidation accelerated after Congress removed barriers to interstate banking and that it has proceeded more or less steadily since that time. And we do not know if and to what extent other factors, such as achieving the desired level of economies of scale, for example—have been driving consolidation. We have recently seen a rising number of acquisitions by credit unions, and we do not fully understand the implications of this trend, which seems likely to continue to accelerate. And we know that profitability is a more important factor in predicting acquisitions than bank size or geographic area, but more research on why some smaller banks are more profitable than others could be valuable. We know from the CSBS surveys that regulatory costs are motivating banks that are considering selling or merging, and we could learn more about what is motivating buyers.”

That’s pretty consistent with our core strategy.

We look for smaller banks at a discounted valuation. These are firms with a strong financial condition but are facing the massive headwinds of regulatory and technology costs.

We like to see insider and activist ownership as well. While activists push for a sale, those with skin in the game push for the best possible price.