The Choice Facing Every Bank

Has your executive team been approached by leaders of
another bank interested in an acquisition? It likely means your bank is doing
something right. But, now what?

Many CEOs’ visceral response to being asked to consider a
deal is to say, “Thanks, but no thanks” and continue running the bank. While this
may be the correct response, this overture is a chance for leadership to objectively
revisit the bank’s strategic alternatives to determine the best option for its shareholders
and other stakeholders.

Stay the Course
Boards must objectively identify where their bank is in its life cycle – be it turn-around, growth or stability – and what will be needed to successfully compete at the next stage. Ultimately, they must determine if the bank can drive more long-term shareholder value staying independent than it could with a partner. They must also weigh the risk of remaining independent against the potential reward.

Directors should prepare five-year projections, ideally
with the help of a financial advisor, that assume the bank continues to operate
independently. They should forecast growth and profitability that reasonably
reflect current marketplace dynamics and company strategy, and are generally
consistent with past performance. Consider opportunities to lower funding costs,
consolidate or sell unprofitable branches, add lines of business, or achieve
economies of scale through acquisitions or organic growth. However, be
cognizant of market headwinds: low interest rate environment, slower projected
loan growth, increasing cost of technology and cybersecurity, regulatory burden,
competition, demographic trends, upcoming presidential election and so on. The
board should also consider organizational issues such as succession planning –
a major issue for many community banks. How do these factors impact the future
performance of your institution? Will your bank be able to meet shareholder
expectations?

Merge with Peer
Peer mergers have been a hot topic of late. The bank space has seen several high-profile transactions: the merger between BB&T Corp. and SunTrust Banks to form Truist Financial Corp.; Memphis, Tennessee-based First Horizon National Corp. and Lafayette, Louisiana-based IBERIABANK Corp.; Columbia, South Carolina-based South State Corp. and Winter Haven, Florida-based CenterState Bank Corp.; and McKinney, Texas-based Independent Bank Group and Dallas-based Texas Capital Bancshares.

The opportunity to double assets while achieving
economies of scale can drive significant shareholder value. But these
transactions can be tough to nail down because both parties must be willing to compromise
on key negotiation topics. Which side selects the chairman? The CEO? How will the
board be split? Where will the company be headquartered? What will be the name
of the future bank?

Peer mergers can be risky propositions for banks, as
cultures don’t always match and integration can take several years. However,
the transaction can be a windfall for shareholders in the long run.

Sell
A decision to sell almost always generates the greatest immediate value for shareholders. Boards must ascertain if now is the right time, or if the bank can do better on its own.

Whether or not selling creates the highest long-term value
for shareholders depends on several factors. One factor is the consideration
mix, if any, between stock and cash. Cash gives shareholders the flexibility to
invest and diversify the net proceeds as they see fit, but capital gains will
be taxed immediately. Stock consideration is generally a tax-free exchange,
when structured correctly, but it is paramount to select the right partner. Look
for a bank with a strong management team and board, a proven track record of
building shareholder value and a plan to continue to do so. That partner may
not offer you the highest price today, but will most likely deliver a better
return to shareholders in the long run, compared to other potential acquirers. Furthermore,
a partner that is likely to sell in the near-term could provide a double-dip –
a potential homerun for your shareholders.

It is crucial to consider what impact a sale would have on other stakeholders, like employees and the community. Prepare your bank to sell, well in advance of any conversations with potential acquirers. Avoid signing new IT contracts with material termination costs; it is an opportune time to sell when core processing contracts are nearing expiration. In addition, review existing employment agreements and consider establishing a severance plan to protect employees ahead of time.

Being approached by a potential acquirer gives your bank an opportunity to objectively reflect on its strategy and potentially adjust it. Even if your bank hasn’t been contacted by a potential acquirer, the board should still review the bank’s strategic alternatives annually, at a minimum, and determine the best path forward.