On the Buy Side

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A successful acquisition requires careful evaluation and negotiation

By Brian O’Connell

ICBA member surveys in late 2013 and 2012 consistently found that the vast majority of community bank executives have remained in a buying rather than selling mood. However, for community banks contemplating a strategy of growth by bank or branch acquisition, several steps must be navigated successfully before signing on the dotted line of any acquisition deal, industry consultants point out. Those steps primarily include determining what assets and advantages an acquired bank should provide, identifying the right prospects to acquire, making initial contact with such a bank, making a productive offer and then closing the final deal.

Thomas Mecredy, a senior vice president at Vining Sparks Community Bank Advisory Group in Austin, Texas, says the drive at any community bank to acquire a potential takeover target has to come from the executive suite, and the actual steps to approaching that target should come from the CEO’s office, too. “The CEO needs to reach out internally and externally,” Mecredy says. “It could mean asking board members to use their contacts to identify a community bank looking to sell. Or the CEO can reach out to other banks’ CEOs for an insider’s look at what might be available on the open market.”

Community banks can also take a high-tech, systematic approach to identifying and approaching a bank with the intent to buy, consultants say. “The bank should establish a ‘heat map’ of potential competition and branches within its current and wish list footprint strategy,” says William “Bill” Weber, senior vice president at the institutional depository group at Drexel Hamilton LLC in New York City. “The potential acquirer should do as much independent due diligence prior to approaching an institution, along with a letter of introduction, on its own or with representation such as an investment bank,” he suggests.

“The potential acquirer should do as much independent due diligence prior to approaching an institution, along with a letter of introduction, on its own or with representation such as an investment bank.”
—William “Bill” Weber, bank acquisition consultant

Because a bank acquisition represents an alternative to achieving more organic growth, several consultants stress that community banks should carefully consider the full implications, the benefits and the potential drawbacks of acquiring another bank or bank branch. Every acquisition should better position the buying bank to grow further in the future, beyond the combined accounts and assets of the two institutions involved. Even if an acquisition may help a bank reduce its operational costs, the deal should also help it increase new revenue beyond what both banks generated beforehand.

“They need to understand the market potential, how to sell to that market and how to sell to customers who never come to the branch,” says Joe Waites, CEO of CECO Management Consultants LLC, a financial services consulting firm in Atlanta. “Banks need to learn how to grow real revenue—not just the combining of revenues of banks.”

“If the bank is struggling with growth within its current markets, even though there is significant opportunity, an acquisition may seem like the best way to achieve that growth,” Waites continues. “Unfortunately, they will be just adding more accounts to their book of business without the ability to grow that book of business.”

“Banks need to learn how to grow real revenue—not just the combining of revenues of banks.”
—Joe Waites, bank management consultant

Weber also offers a checklist of “key steps” to take throughout the entire community bank buying process, a list that he says largely depends on a careful, diligent, patient step-by-step mindset from the acquiring bank’s executives:

  • Identify a target bank that provides additional opportunities for revenue growth, operational efficiencies and business lines, and that mirrors the acquiring bank’s business culture and philosophies, and overall branding goals and strategies.
  • Determine whether an investment bank might be beneficial to help manage the acquisition process or provide a fairness opinion, a report that weighs the pros and cons of a possible acquisition. By and large, fairness opinions are produced by investment bank analysts (although they can be generated in-house) on behalf of acquiring company decision makers.
  • Study the regulatory factors and hurdles, including the regulatory capabilities and standing of the bank to be acquired, and the potential accounting treatments that might result from the acquisition. (Think nonperforming assets and troubled debt restructurings.)
  • Set up internal due diligence teams and identify key bank personnel to evaluate acquisition metrics for operational functions, such as staff size, technology costs, human resources, and sales and marketing efforts.
  • Create a letter of intent, which should include the amount of cash and contingency payments involved in the closing costs of a proposed acquisition.
  • Develop a thorough understanding of the strategies, complexities and costs associated with acquiring and merging operations, including information technology systems as well as physical branches and facilities.
  • Identify critical purchase accounting decisions based on current market value versus book carrying cost of the potential acquisition target.
  • Identify assets or liabilities that will require divestiture or deleverage while applying the purchase accounting treatment.
  • Set target date to complete the proposed acquisition deal.

A Sluggish M&A MarketAccording to a 2013 study by KPMG, community bank decision makers “are optimistic about their growth prospects” in 2014, although that growth is threatened, those executives add, by a sluggish economy and a more onerous regulatory landscape.

Consistent with a wide range of ICBA and other industry surveys, it’s no surprise that “regulatory pressures” were seen by 42 percent of top community bank executives as the largest obstacle to growth for their institutions, even though the vast majority expect to earn increased revenues this year and beyond. Whether interest rates remain extremely low or begin their inevitable climb from the basement will also have a larger effect on bank profitability in 2014 and beyond. Those factors all influence the potential buying and selling moods of community banks.

Through November 2013, 117 banks changed hands last year in merger and acquisition deals that exceeded $1 million in sales value, for a total value of $13.3 billion. That compares with 129 deals worth $11.9 billion in the first 11 months of 2012, according to data from American Banker.

In other words, the number of deals was in decline, with 9 percent fewer deals in 2013 than in 2012, but the deals that were made last year saw a 12 percent uptick in overall deal value.

“Many have been predicting a flood of M&A activity in this industry over the past several years, but it’s been more like a steady drip,” explains John Depman, director of regional and community banking at KPMG. “The fact is that it’s tough to get a deal done. The bid-ask price spread, the regulatory environment and targets’ balance sheet issues are all real challenges to overcome.”

Merger and acquisition experts also advise keeping a sharp eye out for any potential traps or land minds on the path to purchasing another bank. Weber says bank acquisitions are most commonly undermined by “weak due diligence practice and proper evaluation of the balance sheet.” He warns bank executives to watch for any miscalculation of retention and roll-off of the branch deposit base, and to accurately price the acquiring target’s loan and investment portfolio assets.

Waites emphasizes that an acquiring bank should determine if it has the right people to grow the current book of business and whether they have the capability to handle the increased book from an acquisition.

Geographical location and the merging, training and management of staffers also deserve careful scrutiny, advises Paul Schaus, president and CEO of CCG Catalyst Consulting Group, a management consulting firm in Phoenix. “Being either too much or too little concerned with geography can be a problem,” Schaus says. “Just because a bank covers an adjoining region, doesn’t make it a fit.”

Schaus also lists technology integration (“which will be harder than a bank CEO thinks,” he says) and managing the different approaches to customer engagement as potential pitfalls to successful bank acquisitions. “From the training of tellers to the format of electronic communications, that is a major and urgent undertaking,” he suggests.

For obvious reasons, great pains should be taken to avoid creating any competitiveness or animosity between the buying and selling banks, consultants say. “Not recognizing the cultural differences can be a big headache,” Waites advises. “You don’t want to favor the acquiring bank staff over the acquired bank staff, and you don’t want poor communications to new customers coming right out of the gate.”

One potential longer-term implication to consider should be the possible portfolio problems that stress testing might reveal from the assets of an acquired bank, some consultants suggest. Waites predicts stress testing will move down to the community banks in a couple of years, and that will impact mergers completed now, with possible fallout coming down the road. “Stress testing is being phased in with the largest banks first and now moving to banks with assets between $10 and $50 billion,” he says. “When banks determine that an acquisition that they completed in 2013 or 2014 is now hurting their stress test and they can no longer pay dividends, their shareholders are not going to be happy.”

Timing can often be a big variable hovering over the process of acquiring another bank. But consultants caution that buying banks would do well not to move too fast through any acquisition. It’s most important to ensure that all of the benefits and potential drawbacks of any deal are fully evaluated, they say. Rushing into an acquisition can produce as many regrets as missing out on a potentially compatible one.


Brian O’Connell is a writer in Pennsylvania.

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