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Competition for Deposits Impacts Sale Prices of Banks, Local Industry Watchers Say

11 October 2018

(The St. Louis Business Journal)

Oct. 10 2018 (Greg Edwards)

Banks looking to buy other banks increasingly are attracted to those with an abundance of deposits more so than a record of loan growth, a reverse in trend, according to two industry watchers.

“Over the years, bank buyers have looked for good loan growth, that is, strong banks, and that has been a positive for bank stock valuations,” said Eddie Vigil, who follows community banks at Argent Capital Management, with more than $3 billion in assets under management.

More recently, with competition for deposits increasingly fierce, that’s changing, Vigil said. Some buyers are willing to pay more for banks that are heavy in deposits but light in loans, citing First Busey Corp.’s (Nasdaq: BUSE) pending $305 million acquisition of Bank of Edwardsville, which as of June 30 had less than $900 million in loans and $1.6 billion in deposits. “The buyer can take those deposits and convert them to loans,” he said.

“I agree,” said Jim Watson, chairman and CEO of Midwest BankCentre, with $1.9 billion in assets. “Banks that have strong core deposits and relatively low cost of funds will command a higher valuation in the marketplace.” That was part of Midwest’s attraction to Southern Commercial Bank, which it bought in 2015 for $74 million, he said.

Watson and John Stupp Jr., chairman and CEO of Stupp Bros. Inc., which owns Midwest, recently told the Business Journal they remain interested in acquisitions, though prices have gotten higher since the purchase of Southern Commercial, as well as the $14 million acquisition of Bremen Bank & Trust in 2016. “Pricing has increased substantially compared with what we paid,” Watson said.

As the Business Journal reported last month, the competition for deposits in St. Louis is heating up, with a bidding war for certificates of deposit and checking and money market accounts. Reasons for the rate increases include rising Federal Reserve rates and a strong economy, leading to more demand for deposits to fund loans.

The competition for deposits is even more intense in St. Louis because it is such a fragmented banking market. Unlike most cities, St. Louis has no dominant bank in deposits, which total $103.6 billion. No bank here has more than 15 percent share of the deposits in the market, and most banks are lower than single digits. For example, U.S. Bank, the deposit leader among retail banks in St. Louis, according the the latest report from the Federal Deposit Insurance Corp.