Dressed to Sell

By David Wood

As we move through 2019, a prevailing industry trend is that more and more banks are finding it advantageous to work together rather than going it alone. The most notable example of this is the BB&T-SunTrust merger that is currently in progress. The ramifications of this mega-deal are trickling down in many markets, especially in the Southeast, and some small to midsize banks are now looking to follow suit, using M&A as part of their growth strategies.

This approach makes sense for some institutions, particularly for some smaller banks, as it provides the ability to quickly pivot to react to market conditions and provides faster time to market for new products and services. More importantly, it allows community and regional banks to more readily adapt and fill those potential market share voids created by the mergers of much larger financial institutions, with a notable case in point being the recently completed merger of Florida-based CenterState Bank ($12.3 billion in assets) and Birmingham, Ala.-National Bank of Commerce ($4.3 billion).

For banks looking to either merge or be acquired, they must first consider themselves objectively: Do they operate in a growth market that is hospitable to continued growth? Are there efficiency issues at present that are negatively affecting profitability? A potential acquiree must be realistic in understanding that a $150 million bank, for example, may not be as attractive a target to $12 billion banks. Rather, it should likely focus its attention on potential acquirers in the $500 million to $1 billion range.

In some ways, courting an acquiring bank draws correlations to that of a homeowner selling a property. Just as a new deck, remodeled bathroom or refreshed kitchen increases the ROI on the property and makes it more attractive to a potential buyer, so the healthier a bank is both internally and externally, the more attractive of an acquisition target it becomes. Additionally, banks that offer additional services—such as SBA lending, mortgage banking options or their own unique credit card offering—may allow a potential acquiring bank to see more opportunity and growth potential through that acquisition. Typically, the more diverse the revenue stream, the more attractive the target.

M&A is a complex process and from a potential acquirer’s perspective, there are several key areas that may be used when deciding on a potential acquisition:

  • Is the bank free of any major issues (and not a fixer-upper) that will in essence devalue the price the bank might command in an acquisition?
  • Is the bank positioned in a high growth market? Is it well-established and viewed favorably in the communities in which it operates?
  • Is the bank solely seeking to be acquired as an exit strategy for the initial investors, or is it committed to establishing a more long-term strategic partnership?

Overall, M&A can be a powerful growth strategy for smaller banks, whether as a target of acquisition by a larger institution or through a merger of equals. In either case, both sides must carefully consider their existing customer bases and how to ensure the strength of those relationships rather than risk alienating them following an M&A event. By focusing on the elements that make an attractive acquisition, regardless of size or M&A considerations, banks can ensure that they are better positioned to compete in an ever-changing market.

David Wood, CPA, is a partner at Porter Keadle Moore (PKM), an Atlanta-based accounting and advisory firm serving public and private organizations in the financial services, insurance and technology industries as well as a diverse group of entrepreneurial small business clients.