Those interested or involved in the banking industry have read plenty about the state of community banks, as the past several years have proved challenging. Many banks rode the wave of easy access to capital, often through the issuance of trust-preferred securities and/or participation in the government-assisted Troubled Asset Relief Program. This all was followed by a significant deterioration in performance as the economy came to a grinding halt almost instantly thereafter.
The result? Although the economy has stabilized, and most of the country's 7,000 banks are flush with capital and liquidity, some still have broken balance sheets that are overleveraged and undercapitalized, with about 600 institutions remaining on regulators' problem list. This is bound to lead to increased M&A as healthier banks begin to consolidate smaller banks. In the meantime, deals are already being done among healthy banks that see the ongoing operating environment as uncertain. These banks are selling on the belief their best shot at a good return in the future is taking the stock of someone else someone larger today.
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