What To Do When There’s Little Going On

It’s been years since the bank M&A market had any kind of excitement in it. Predictions of a coming wave of M&A have yet to materialize. In this context, it makes sense for bank boards to assess their strategies with the interests of shareholders in mind. Bank Director magazine talked with Bryan Cave LLP partners Jim McAlpin and Walt Moeling about the M&A market, and what boards should consider before joining forces with another bank.

What does the M&A market look like?

Walt Moeling: I think the market is clearly reviving. Since it’s a case of coming back from the dead, any positive change is going to show up as a significant statistic. 

Jim McAlpin: Particularly in markets where you have a double-digit number of banks with high concentrations of Texas ratios in excess of 200 percent, such as Georgia, Florida and Illinois, there is an overhang impact of uncertainty on the entire market. Until we get through the remaining bank failures and a resulting asset stabilization, there will continue to be an overhang for those markets.  Also, many people now seem to be pausing in terms of proactive moves until the presidential election is resolved this fall.

Walt Moeling: The real goal is certainty. Most banks have gotten resigned to regulation. They want to know what the tax rates are going to be and they want to know what the rules are. Their customers aren’t going to borrow until this happens. 

What does the market look like in terms of pricing?

Jim McAlpin: The average pricing is one times tangible book or a little more than that. We’ve seen deals in excess of that in hot markets, such as in Houston, Texas.

Walt Moeling: A buyer is going to see if the future earnings will justify the price. The stronger your growth potential, the greater projection a bank can make of your future earnings.

So how do you best ensure you have value in your institution, which will make it attractive to investors?

Jim McAlpin: Management of a bank that is looking to sell should ask: To what degree do we dominate our market in terms of core deposits and loans? In the metro markets, that will be hard to do. But particularly in the smaller, more rural markets, it can and should be a goal. We talk to our clients about picking one or two things the bank is particularly good at. You can say, ‘We’re going to dominate a three county area.’ You can say, ‘We’re going to build our base of loans and be a real value to the community.’ There is a need for the institution and the board to determine, ‘Where are we going with this institution and how do we chart a course?’ Taking one or two days per year to sit down and do strategic planning is important. You can ask: ‘Do we have to be larger?’ The answer is not always yes. It’s really important for a board to decide on the bank’s strategic goals and guide management toward achieving those strategic goals.

How do you start the discussion about whether to buy or sell?

Walt Moeling: When you get in the board room, you have to start with a strong analysis of your shareholder base.  I had one board member say, ‘I’m 74 years old and we’re four years away from paying dividends. I’m not sure I care what happens four years down the road.’ Do you have management ready to fight these new regulations and drive the bank forward?

What should you consider if reviewing an actual sale?

Walt Moeling: The board has to first assess its shareholder base. Can we afford to turn this down? Is there going to be tremendous backlash from shareholders? Are the core shareholders going to turn this down? Boards need to hire an investment banker to assess what their own independent future looks like. What are your goals and can you achieve those goals realistically? We have always recommended a constituency provision. The constituency provision in the articles of incorporation says that in any offer to acquire the bank, the board is expressly authorized to take into account (an acquisition’s) impact on the bank’s customers, vendors, employees and the communities it serves.

Jim McAlpin: The board needs to take charge of this process. The board cannot defer to management to make this decision. That is a mistake we sometimes see. If they’ve done strategic planning, they are in a much better position to evaluate an offer in the context of what their goals are.

Walt Moeling has counseled financial institution clients on corporate governance matters, operational and regulatory issues, capital and acquisition strategies, board disputes and dissident shareholder issues for more than 40 years.

Jim McAlpin represents community banks and regularly counsels financial companies and banks on corporate governance matters, regulatory issues and strategic planning. Jim has an expertise in the duties, responsibilities and fiduciary obligations of corporate directors and represents boards of directors and special committees.