How to Completely Change Your Future


strategic-planning.pngIs the regulatory burden getting you down? Does your market offer slow to no growth? Are your shareholders increasingly fed up with that?

It might be time to buy a bank or sell to a competitor with better prospects for growth.

Banks face some very significant challenges in the years ahead. The sharply increased cost of regulatory compliance might lead some to seek a buyer; I have seen others respond by trying to get bigger through acquisitions in order to spread the costs over a wider base.

Quite a few banks have already made difficult decisions such as these. For instance, one of last summer’s notable bank dealsCIT Group’s purchase of Pasadena, California–based OneWest Bank — was struck in part because of the costs of regulation. Likewise, the board of Michigan–based Citizens Republic Bancorp sat down with its CEO a few years ago and seriously considered its strategic options for the future, with the end result being a sale to Ohio–based FirstMerit Corp. It wasn’t that Citizens didn’t have a future. The conclusion was that the future was better paired with a larger organization.

In last month’s column, Will Nonbanks Impact Bank M&A?, I looked at how Lending Club and Prosper, two online lending marketplaces that offer loans to consumers and small business funded by private investors and institutional money, present significant challenges to those looking to expand their lending portfolios. With Lending Club announcing on July 14 that its marketplace is available to investors in Arkansas, Iowa and Oklahoma, I have to assume that officers and directors in those and other states are considering how to either fend off such threats — or potentially partner with them to gain access to new lending opportunities.

With competition coming from both the top of the market and from non-traditional players, it is imperative for community banks to focus on improving efficiencies and enhancing organic growth prospects. Those with the best prospects? The 550 or so banks between $1 billion and $10 billion in assets — and within this niche, banks with bold, creative and disciplined CEOs. Banks in this range have both the size to compete technologically and the scale to begin to afford the regulatory compliance burden.

While transforming a franchise through organic growth is desirable and potentially less risky, I continue to see better growth prospects from acquisitions in many parts of the country.

Earlier this year, at Bank Director’s Acquire or Be Acquired conference in Phoenix, KPMG’s Hugh Kelly offered that with growth opportunities available through M&A, many sellers will be motivated by getting out from regulatory burdens. At a minimum, regulators expect a bank’s strategic planning process to consider the following questions:

  • Where are we now?
  • Where do we want to be?
  • How do we get there?
  • How do we measure our progress?
  • What adjustments are necessary to meet our goals?

If you don’t have satisfactory answers to those questions, your bank might consider a sale to a bank with solid growth prospects. As John Gorman and Eric Luse with the Washington, D.C.–based Luse Gorman law firm shared at the same conference, “increased regulatory and compliance costs have changed the banking business in a fundamental way.” As the two note, this has squeezed profitability, particularly for smaller banks, and pressure to consolidate and achieve economics of scale has increased.

However, many deals are delayed for regulatory reasons.

While many point to the potential for nonbanks, such as the Lending Clubs and Prospers of the financial world, to steal marketshare, regulatory risk is probably the greatest obstacle to completing an M&A deal, and ironically, may be the very thing driving it.