For as many banks that would love to be acquired, even more prefer to remain independent. Some within the second group have even taken steps to reduce their allure as acquisition targets.
I was reminded of this recently when I met with an executive at a mid-sized privately held community bank. We talked for a couple hours and then had lunch.
Ordinarily, I would go home after a conversation like that and write about the bank. In fact, that’s the expectation of most bank executives: If they’re going to give someone like me so much of their time, they expect something in return.
Most bank executives would welcome this type of attention as free advertising. It’s also a way to showcase a bank’s accomplishments to peers throughout the industry.
In this particular case, there was a lot to highlight. This is a well-run bank with talented executives, a unique culture, a growing balance sheet and a history of sound risk management.
But the executive specifically asked me not to write anything that could be used to identify the bank. The CEO and board believe that media attention — even if it’s laudatory — would serve as an invitation for unwanted offers to acquire the bank.
This bank in particular has a loan-to-deposit ratio that’s well below the average for its peer group. An acquiring bank could see that as a gold mine of liquidity that could be more profitably employed.
Because the board of this bank has no interest in selling, it also has no interest in fielding sufficiently lucrative offers that would make it hard for them to say “no.” This is why they avoid any unnecessary media exposure — thus the vague description.
This has come up for me on more than one occasion in the past few months. In each case, the bank executives aren’t worried about negative attention; it’s positive attention that worries them most.
The concern seems to stem from deeper, philosophical thoughts on banking.
In the case of the bank I recently visited, its executives and directors prioritize the bank’s customers over the other constituencies it serves. After that comes the bank’s communities, employees and regulators. Its shareholders, the biggest of which sit on the board, come last.
This is reflected in the bank’s loan-to-deposit ratio. If the bank focused on maximizing profits, it would lend out a larger share of deposits. But it wants to have liquidity when its customers and communities need it most – in times when credit is scarce.
Reading between the lines reveals an interesting way to gauge how a bank prioritizes between its customers and shareholders. One prioritization isn’t necessarily better than the other, as both constituencies must be appeased, but it’s indicative of an executive team’s philosophical approach to banking.
There are, of course, other ways to fend off unwanted acquisition attempts.
One is to run a highly efficient operation. That’s what Washington Federal does, as I wrote about in the latest issue of Bank Director magazine. In the two decades leading up to the financial crisis, it spent less than 20% of its revenue on expenses.
This may seem like it would make Washington Federal an attractive partner, given that efficiency tends to translate into profitability. From the perspective of a savvy acquirer, however, it means there are fewer cost saves that can be taken out to earn back any dilution.
Another way is to simply maintain a high concentration of ownership within the hands of a few shareholders. If a bank is closely held, the only way for it to sell is if its leading shareholders agree to do so. Widely dispersed ownership, on the other hand, can invite activists and proxy battles, bringing pressure to bear on the bank’s board of directors.
Other strategies are contractual in nature. “Poison pills” were in vogue during the hostile takeover frenzy of the 1980s. Change-of-control agreements for executives are another common approach. But neither of these are particularly savory ways to defend against unwanted acquisition offers. They’re a last line of defense; a shortcut in the face of a fait accompli.
Consequently, keeping a low media profile is one way that some top-performing banks choose to fend unwanted acquisition offers off at the proverbial pass.
While being acquired is certainly an attractive exit strategy for many banks, it isn’t for everyone. And for those banks that have earned their independence, there are things they can do to help sustain it.
If you talk to enough executives at top-performing banks, one thing you may notice is that not all of them see themselves as bankers. Many of them identify instead as investors who run banks.
The robot (wealth advisors) are here.
Financial technology, or fintech, is rapidly and dramatically changing the financial services landscape, forcing banks to respond.
It starts with a simple question from a director or regulator about the bank’s loans, deposits or customers. It should be easy to answer but for some reason, it takes days or weeks to get the information.
The success of a bank’s merchant services program lives or dies by the support from branch staff.
Mortgage subservicing has made significant in-roads among banks, as more institutions decide to outsource the function to strategic partners.
For someone who has covered the banking industry as long as I have (hint: I wrote my first banking story in 1986), these are among the best days to be a banker—or director of a bank—that I can remember. Profitability is high, as is capitalization, and the industry is gliding on the updraft of a strong economy and lower taxes.
How should you position your bank for the future—or, for that matter, the present?
Great leaders are eager to learn from others, even their competitors. That’s why Bank Director is making available—exclusively to members of our Bank Services program—the unabridged transcripts of in-depth conversations our writers have with the executives of top-performing banks.