MERGER AND ACQUISITION ISSUES

IS M&A LIMITED TO LARGER BANKS?

No.

M&A Planning is important to firms of all size.

Banks with total assets of less than $500 million have been involved in over 75 percent of bank acquisitions in recent years. And in over 25 percent of these bank acquisitions, these Community Banks have been the buyers.

As part of their strategic planning, Community Banks should know answer to each of these two questions:

  1. What bank(s) would your Bank want to acquire and can afford to acquire?

  2. What bank(s) would want to acquire and could afford to acquire your Bank?

2020 Bank Mergers - Acquirers by Bank Size.

2020 Bank Mergers - Sellers by Bank Size.

ACQUISITION STRATEGIES

IN-MARKET

Typically acquisition of another bank in the same city or county to gain market share and leverage staff and operating infrastructure.

 

CONTIGUOUS MARKETS

Acquisition of bank located in a county contiguous or adjoining the county where your bank is located. These acquisitions are carried out to gain market share and to leverage staff and operating infrastructure.

 

SIMILAR MARKETS

Acquisition of bank located in a market with similar characteristics to the market where your bank is headquartered. Such markets could be county seats, university and college towns, rural markets and others.

 

NEW PRODUCTS OR SERVICES

Acquisition of bank with a unique product or service that can be also delivered to customers in your home market.

 

NON-BANK

Acquisition of a non-banking firm to add a new product or service capability to your organization. Such new products or services could include mortgage originations, mortgage servicing, credit card, leasing, insurance and others.

 

FAILED BANKS

Acquisition of a failed bank or thrift to augment a market presence or to enter a new market.

FAILED BANK ACQUISITION READINESS

Bank failures typically do not occur in large numbers like in the late 1980’s and during the Great Recession. However, these failures are a normal occurrence but only come around on rare occasions.

Is your bank prepared? Are you ready to move on relatively short notice?

Over the past few weeks, the FDIC has closed three banks and sold the deposits and most of the loans to other banks. There will be more opportunities - perhaps in December or early 2020 as the FDIC performs year-end clean up on its very limited troubled bank list.

Here are several readiness steps that you should consider taking:

  1. If not already completed, go to the Failing Bank Acquisitions webpage of the FDIC and complete the Potential Franchise Bidder Contact Form.

  2. Review the detailed information on the FDIC Marketing Process webpage to understand how the process for acquiring a failed bank works.

  3. Do some additional homework on banks that have very low Tangible Equity Ratios (equity capital net of intangible assets divided by total assets). You can pull down bulk FDIC Call Report files and determine which banks have ratios well below 5%.

  4. Establish a small team to carry out several key activities: pre-bid due diligence, bid pricing and proposal, date of closing integration planning and final merger integration planning. See Merger Readiness Planning.

Acquisitions of a failed bank can present a unique opportunity for your bank to gain market share or to enter a new market. These opportunities do not come around often. Prepare your bank and your team so that you can seize upon such an opportunity.

BANK ACQUISITION ACTIVITY ACROSS U.S.

 
 

States of Sellers

 

States of Acquirors

WHY IS M&A PLANNING IMPORTANT TO COMMUNITY BANKS?

M&A planning may be more critical now than ever before for Community Banks. With home market growth slowing, moving into adjacent markets via branch or whole bank acquisitions allows the banking institutions to continue to grow and leverage their operating infrastructure.

According to a study in the FDIC Quarterly for Q3 2017, the following are key characteristics of acquisitions made by Community Banks:

  1. Typically less profitable than their peers;

  2. Maintained lower capital ratios;

  3. Held a higher percentage of core deposits;

  4. Carried lower loan-to-deposit ratios; and

  5. Had better loan quality indicated by lower ratios of nonperforming assets.

These characteristics are similar to those seen across the decades of bank acquisitions:

  1. Earnings can be improved and fixed

  2. Excess capital should not receive an acquisition premium; and

  3. "Turn-around" situations resulting from loan and asset quality issues should be avoided.

Community banks do smart acquisitions - and are leaders in bank acquisitions!

The study can be found at this link: Community Bank Mergers Since the Financial Crisis.

WHAT DO COMMUNITY BANK MERGERS LOOK LIKE?

This is a link to a post by Wachtell Lipton on Financial Institution Developments relating to bank mergers and board responsibilities posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation. The article focuses on fundamental principles of deal execution, including pricing, shared vision and transaction conditionality features.

NOTEWORTHY ARTICLES ON BANK MERGERS