I don’t know about you, but recent developments in banking have me flashing back to 2007 — when we saw large banks reap the consequences of some risky activities — and community banks were pulled into the fallout. The recent downfall of certain large banks (you know the ones I mean!) has made a big splash in public bank stock prices, the overall economy, and public sentiment toward banking.
So, how has this impacted the value of privately owned community banks? Several bankers have called to ask exactly this. How does the current banking environment play out in a bank valuation? Let’s explore.
The first thing to consider is the valuation date. During the first part of this year, most of our firm’s bank valuations were as of a date late in 2022 (for gifting, ESOPs, buy/sell agreements, etc.). Since appraisal standards require that a valuation be performed on the basis of what was “known or knowable” as of the valuation date, a late 2022 value does not show the effect of recent developments. But as we pull ahead to more recent dates, the effects creep in.
Public banking stock prices are down, no question. However, many community banks are insufficiently comparable to public banks, and no weighting is placed on a Guideline Public Company Method. Uncertainty, however, IS a factor that has a valuation effect.
Most notably, this shows up in the Discounted Cash Flows Method — a forward-looking method based on a bank’s forecast. Uncertainty is synonymous with risk in the valuation world. But, for what it’s worth, uncertainty has been a bigger player in bank valuations since 2020 for other reasons: a worldwide pandemic, rising interest rates, and economic concerns (the list is longer, but these are the top three). So, a different reason, but more of the same.
Recent banking transactions also are an indicator of value, but it is hard not to notice that far fewer banks are changing hands. The recent bank drama may have a slight bearing here, but the big driver is those unrealized bond losses. While unrealized losses are sitting on a bank’s balance sheet, value is unaffected (a valuation measures the value of operations, not investments). But most owners are not interested in selling a bank in this environment and realizing those losses.
I will leave you with this: the recent large bank drama is viewed as transitory. This too will pass, but the standard of fair market value takes a longer look. The value of larger banks is likely to be somewhat suppressed because of higher comparability to public banks, while community banks are less affected (this seems fair, doesn’t it?). If you are a community bank, the value of your bank is still most associated with the cash flows you will achieve in the future. Your value ties to your profitability, asset strength and growth.
For more information, please reach out to Lindy at lindy@bccadvisers.com or visit www.bccadvisers.com.
