Increased M&A Activity Creates Opportunities for Your Community Bank
As we get farther away from the economic downturn, banks are dealing with fewer asset quality issues and increased, albeit modest, profitability. As a result, growth is on the minds of bank boards and shareholders as a means to deploy capital, with the mindset that bigger is better.
By understanding transaction trends in the community merger and acquisition (M&A) market, you can better prepare for the future, whether that means acquiring, merging, or even selling your bank.
M&A activity increases across the industry
There is no doubt that community bank M&A is alive and well in most areas of the country. Community banks merge and acquire for various reasons based upon region, but certain parameters are true for all banks.
For instance, banks that are $80 million in total assets today share a common belief that they should grow to $125 million. Banks with $350 million in total assets have a targeted goal of $500 million. These expectations exist for banks of all sizes, and are reflected in the increase of M&A deals, shown in the graph below.
The increase in deals from 2011 to 2015 is close to double, which is not surprising considering the financial status of banking at that time. While 2016 is somewhat behind the pace of the prior two years, the second half of any given year typically shows an increase in transactions.
It’s worth noting that bank consolidation has been occurring in the industry for decades, but slowed down from 2007 to 2013. While the future pace of consolidation is yet to be seen, it will likely be similar to what was occurring prior to 2007.
Pricing and succession drive M&A activity
Until recently, potential sellers may have been waiting for better pricing, or actively attempting to rectify problem assets and improve their core earnings. With pricing improving, bank owners are once again discussing the future of their organization, which has resulted in increased community bank M&A.
In areas where smaller, closely held banks are prominent, many M&A decisions begin due to a lack of succession in management, combined with current management’s age or potential burnout. In larger regional banks, shareholder dissatisfaction related to lack of growth and/or profitability often becomes the driving force behind selling.
Bank growth presents challenges
Compliance costs, IT investment demands, and shrinking margins are all putting pressure on bank management and their related profitability. The organic growth needed to spread out these costs has proved challenging to obtain. While credit unions were not always a large player in the banking market, their recent acquisition of banks across the country has also impacted bank pricing by stripping supply.
Additionally, loan demand in isolated areas and/or isolated banks has surpassed the existing deposit base. These organizations have aggressively pursued core deposit-rich bank charters and/or branches, and they are paying more to get them. General increase in M&A demand, in addition to these obstacles, can hamper a bank’s ability to grow.
How we can help
Community bank M&A will likely continue at a slow, steady pace in the foreseeable future. Whether you’re looking to a buy, sell, or retain status quo, it’s important to understand what direction your bank is heading, and plan accordingly to prepare for upcoming changes or transitions. We can evaluate options for your bank and help you assess how to reach your goals for your organization.
Thinking about selling your bank?
If you are considering selling your bank, versus buying or holding, here are a few important considerations.
Clean up problem assets
The fewer problem asset and regulatory issues you have, the better. If asset problems are long-term in nature and shareholders can’t wait for their orderly liquidation, you may want to consider excluding those assets from the deal. While this is more cumbersome for you as the seller, the pricing increase may be worth the effort. To avoid having to navigate this situation, don’t ignore even the smallest regulatory issues — address them to your primary regulator’s satisfaction.
Examine your vendor contracts
This is often the most cumbersome and costly issue in a transaction. Pressure from vendors to expand the coverage period for IT contracts has dramatically increased. Along with the increase of termination and/or deconversion fees, if a sale and related contract termination occurs midstream, this cost can be a deal breaker. So review your contracts closely before signing.
Retain key employees
Employee retention after a sale is a significant consideration of a buyer, and as a seller it impacts the related value of your organization. Securing your professionals can be vital to a successful sale; talk about this with your staff as you plan your transition.
Fix that leaky roof
Deal with the necessary repairs that you’ve been ignoring, cosmetic or otherwise. A buyer’s first impression results in driving by or stepping inside the facility. You won’t get a second chance.
Review the profitability of each branch
Are all of your branches truly profitable and attractive to a buyer? Examine them thoroughly and objectively, eliminating any emotional ties. Then rid yourself of any nonperformers that may significantly reduce your pricing.
Think like a buyer
Many buyers will likely convert your bank into a branch. As such, remember what they will look for. While a buyer likely won’t need all of your employees, it is not ideal to acquire and quickly terminate positions. If you experience attrition or turnover, consider outsourcing tasks instead of filling open positions. Buyers also often have their own technology and won’t need or want what you purchase, so don’t over-acquire new software or hardware as you move toward your transition. And, as always, keep taking care of your customers — they’re critical to your value.
Be wary of pricing data
In recent years, pricing data of nonpublic deals has been redacted from regulatory applications, so those graphs and charts you see in articles and presentations are likely not supported by reputable data that reflect your situation. Be sure you’re setting expectations for your shareholders appropriately.