Eager or Not, Every Board Needs an M&A Strategy

By Debra Cope

Banks and their boards run the gamut in their attitudes toward mergers and acquisitions, with some actively looking for deals, some open to the right partner and some determined to go it alone. One thing they have in common is that even the most independent-minded bank needs a framework its board can use to evaluate potential transactions, industry experts say.

“You may not be looking, but if an opportunity pops up in your neighboring community, it behooves you to be prepared to strike at it,” says Francis Godfrey, a partner with BKD CPAs and Advisers in St. Louis. “It is a best practice to always have a feel for what the market is in your geographic area and in your industry.”

Deal activity involving community banks with assets of $10 billion or less at midyear 2017 was about even with 2016, but with significant differences. Nine large deals—valued at $500 million or more—had been struck by July, equaling the totals for 2015 and 2016 combined, according to Nathan Stovall, senior research analyst on the U.S. banking sector at S&P Global Markets Intelligence in New York. As of July, the deal pace was on track to hit 237 transactions involving community banks in 2017, up just one notch from 2016, he noted.

In addition, pockets of intense activity, notably in the Southeast U.S., offset a decline in deals in the Midwest, according to Rick Childs, a partner with Crowe Horwath LLP in Indianapolis. Valuations are also up dramatically as stock markets have rallied, pushing community banks’ price-to-tangible-book ratio to 160 percent in the first six months of 2017, from 128 percent a year earlier, he notes.

The budding evidence of a revival in bank M&A, after deal volume fell between 2015 and 2016, is a reminder to boards to assess what their posture toward offers and opportunities will be, and whether they need to fine-tune how they evaluate transactions.

The board’s annual strategic planning session with senior management is usually the ideal venue for a robust discussion of a bank’s M&A strategy, says Paul Jaskot, a partner with the law firm Reed Smith in Philadelphia. “It’s the time when you can take a step back in a more relaxed, thoughtful way to sit down and focus on long-term issues,” he explains . M&A work begins with senior management mapping out strategy, but the board has a responsibility to engage with management in a strategic discussion about where the bank is going and to represent the interests of shareholders, he added.

“Boards should have an awareness of where the institution fits in the M&A market and who some of the likely targets or buyers might be,” Jaskot adds. “If you’re waiting until an offer lands on your desk, you’re probably not fulfilling your fiduciary duties.”

Beyond yes, no or maybe

The strategic planning meeting is a chance to starting drilling down into the details of how the board should evaluate M&A opportunities. “Consider what you would be interested in if an opportunity came to you,” Childs says. “It could be as simple as saying, ‘We’re uncomfortable buying something that takes more than two hours to drive to.’ You can also define how willing you are to take on institutions with some regulatory or earnings issues.”

Every board member should grasp what the bank can afford to buy. “You can use the annual board planning meeting to review an example of what an acquisition would look like on a pro forma basis,” Childs adds.

How frequently M&A should be discussed in board meetings will depend on how actively the bank is pursuing opportunities. “You probably don’t need to do it every month if you’re not pursuing anything, but every quarter is good,” Childs suggests. Board members should expect regular updates on the state of the market and any transactions in the bank’s geographic area, he says.

When the deal gets real

Boards often have a good idea of the type of premium that would get their attention, whether they are buying or selling. But there is a world of difference between developing an M&A strategy and executing it when an offer materializes.

“It’s a really profound and huge responsibility for the board to say, ‘The letter is here. This is real.’ They cannot take it lightly,” says Kat Sanchez, a director of compliance risk at Grant Thornton in Washington.

The board should crack open the bank’s strategic plan as a guide to evaluate offers, adds ABA SVP Helen Sullivan. Key considerations include the benefits to the bank, the impact on shareholders, the financial implications and cultural fit.

It is wise for boards to view M&A through the prism of compliance risk broadly, considering other areas of risk management, such as consumer, operational and third-party risk specifically, Sanchez says. Banks that would break through the $10 billion asset mark as the result of M&A will face intensified regulatory scrutiny and expectation, including the oversight of the Consumer Financial Protection Bureau, she notes. “A problem with a bank’s consumer or vendor management risk profile can be a game-changer, and one high-risk consumer complaint, such as a potential UDAAP allegation, can be a show-stopper,” Sanchez said.

The board that strives to keep the dialogue open and recognizes that talking about M&A isn’t the same as endorsing it can be well positioned to navigate opportunities successfully. “Having a regular dialogue is a way to ensure that when an opportunity does come in, you don’t have to scramble to learn and then evaluate. You can simply apply your criteria,” Childs said.

DEBRA COPE is editor-in-chief of the ABA Banking Journal Director’s Briefing.

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