Bank M&A

How Community Banks Can Fund M&A

bank-manda-6-13-16.pngAs bank mergers and acquisitions (M&A) have increased over the past several years, many banks are considering how to participate as buyers and take advantage of growth opportunities. One critical impediment for banks hoping to participate in M&A is funding the purchase. Many community banks lack a publicly traded stock to use as consideration, so they have to offer all cash in a transaction. When common stock is not used in a transaction, no additional capital is created and it becomes difficult to complete the transaction while maintaining adequate capital. Some banks use their holding company as a source of cash through a loan from a correspondent bank or other lender.

The Federal Reserve has a long-standing Small Bank Holding Company Policy Statement indicating that it does not look at capital ratios on a consolidated basis for institutions with consolidated assets under a certain threshold. Initially this threshold was $150 million in consolidated assets, but it increased to $500 million in February 2006. In April 2015, the consolidated assets threshold was increased again to $1 billion. This change is significant because as of March 31, there were more than 3,700 holding companies with less than $1 billion in consolidated assets, according to S&P Global Market Intelligence, formerly SNL Financial. As a result, the overwhelming majority of bank holding companies can take advantage of the Fed’s policy to engage in bank M&A and use leverage to fund acquisitions.

Between Jan. 1, 2015, and May 6, 2016, 183 acquisitions were announced in which the selling bank had less than $250 million in assets. Almost 69 percent of those transactions were not common-stock based. More than two-thirds were deals in which a small bank holding company (by the Federal Reserve’s definition) could have been competitive because consideration did not require common stock for the selling institution to accept the deal.

Funding M&A With Holding Company Debt
As a bank considers its long-term growth plans, acquisitions are a viable option when the size of the seller lends itself well to the type of consideration a bank can use: cash. As banks consider using holding company debt, it would be helpful to be aware of what qualifies a bank holding company to use holding company debt to fund acquisitions under the Fed’s policy statement:

This policy statement applies only to bank holding companies with pro forma consolidated assets of less than $1 billion that (i) are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.

For most holding companies, these qualifiers won’t have an impact on their ability to rely on the policy statement. When applying the policy for using bank holding company debt in an acquisition, the Fed also includes the following parameters:

  • Acquisition debt should not exceed 75 percent of the purchase price, meaning a minimum 25 percent down payment should be provided by the acquirer.
  • All acquisition debt must be paid off within 25 years.
  • The debt-to-equity ratio at the holding company should be less than 30 percent within 12 years.
  • No dividends are expected to be paid out of the holding company until the debt-to-equity ratio is less than 1:1.

The simplicity of the small bank holding company acquisition debt policy is that it allows holding companies with less than $1 billion in assets to use the cheapest form of capital for corporate level transactions. Subordinated debt, which counts as Tier 2 capital (with limits), is a good source of available capital. However, it should be used to fund an acquisition purchase only if a holding company’s pro forma assets will exceed $1 billion, because the costs and limitations on the debt make it a more expensive and more restrictive type of debt than a simple bank holding company loan.

Additionally, even if acquisitions are not a part of a holding company’s long-term strategic plan, the bank still should consider holding company debt under the small bank holding company policy to:

  • Fund stock repurchases at the holding company to provide liquidity for shareholders.
  • Provide capital for organic bank growth (the repayment can come from future bank earnings).
  • Retire more expensive forms of holding company capital or debt that no longer is needed as a result of the increase in consolidated asset limits.

Industry observers often are critical of regulatory policy. However, this recent change to the small bank holding company policy should be viewed as positive for the industry and the future of community banks.


Rick Childs


Rick Childs is a partner at Crowe LLP.  He has over 35 years of experience in business valuation, transaction advisory services and accounting for financial services companies.  Mr. Childs is the national practice leader overseeing the delivery of transaction and valuation services to the firm’s financial institutions clientele.  His business valuation experience includes ASC 805 purchase price allocations including a focus on loan valuations, ASC 350 goodwill impairment testing and valuation of customer relationship intangible assets, including core deposit intangibles.


Mr. Childs is a frequent presenter for both national and state professional organizations including the SNL Financial, Bank Director, AICPA and Financial Managers Society.  He has published articles on mergers and acquisitions in the ABA’s Commercial InsightsCommunity BankerBank Director and Bank Accounting & Finance.