The metrics around family-owned or privately-held community bank deals often differ from those of the regional and super-regional publicly-held banks that are frequently the subject of media stories, commented a pair of accountants hosting a session at the 31st annual Acquire of Be Acquired conference in Phoenix, Ariz.
Eide Bailly Partner and Accountant Michael Holdren said deals involving family-owned banks often take into account “human” or “emotional” factors which are largely absent from deals involving larger institutions. Eide Bailly Des Moines Market Leader Blake Crow said pricing in small-bank deals doesn’t often follow market-driven metrics.
The annual M&A mega conference hosted by Bank Director magazine opened Sunday, Jan. 26 for a three-day run. Holdren said that while many community bankers will say they are “interested” in bank M&A, or are “open to discussing” a potential deal, most lack a strategic M&A plan. Even though most bankers say they would prefer to grow organically, Holdren said community bankers should employ a defined acquisition strategy, even if they have every intention of remaining independent well into the future. He said, at a minimum, community bankers should:
1) Define an M&A strategy;
2) Discuss at least quarterly the possibility of some sort of M&A; and
3) Conduct a self-assessment to understand what obstacles might prevent the bank from entering into a deal it might want to pursue.
Holdren said that in defining a strategy, a community bank may want to put together an M&A team that discusses possibilities; furthermore, he said it often makes sense to include outside experts on such teams. He said such a team might identify targets, consider the ideal kinds of loan and deposit portfolios they might want to acquire, and how a deal might affect their capital.
Crow amplified Holdren’s comments by noting that “publicly traded banks are not in the same world as family-owned banks … Understand that the competitive arena that you are in is different from the arena of the larger banks.”
For example, he said, most community bank deals are cash deals, as opposed to publicly-traded bank deals which are almost always stock deals.
Crow commented that understanding the competition helps a bank owner make better decisions about potential candidates for acquisition or purchasers of assets the banker might want to sell.
Community bankers interested in pursuing deals need to consider whether their own bank is a C corp or a subchapter S corp., and they need to understand the status of potential targets. Crow said deals can often be structured to make the most of the status of each of the parties in a deal. Banks that have holding companies have even more options to consider.
Unrealized losses in bond portfolios, and mark-to-market accounting related to CECL, are two factors making it difficult to complete some deals, Crow commented.
Credit unions are increasingly emerging as bank buyers. Crow commented that C corp banks that sell to credit unions will need to consider the impact of double taxation on the sale proceeds. While some credit unions will include cash to pay for the double taxation, Crow said those offers need to be closely examined to assure they provide enough cash to cover the entire cost.