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?


BANK ACQUISITION ACTIVITY ACROSS U.S.

 
 

States of Sellers

 

States of Acquirors

Bank Merger Data and Reporting: Link to Bank Street Partners website reports


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


Using the example below, here are some trade-offs:

EPS Dilution: Generally, there will be more dilution to earnings per share the more common stock issued in an acquisition.

Shareholder Control: Issuing new common stock will lessen the level of control by existing shareholders. Depending upon your long term strategy and goals, this may be the most constraining element in any acquisition program.

Capital Ratios: Generally, there will be more deterioration in your capital ratios the more debt is used to finance an acquisition.

Acquisition Capacity: Assuming EPS dilution results are acceptable, follow on acquisitions may be accomplished sooner than if more of the acquisition price is financed with debt. Likewise, with higher capital ratios using common stock, the regulators may view additional acquisitions more positively.

Merger Integration: Merger integration success is a priority for an on-going acquisition program. There are limits on your staff and vendors. Generally, the expectation should be that one acquisition every 12 to 18 months is manageable for most banks.

WHAT ARE TRADE-OFFS FROM USING COMMON STOCK OR DEBT (CASH) IN A BANK ACQUISITION?