Community Bank CEOs: Know your winning value to a bank buyer?

Banks are bought, not sold.

They are bought because the buyer thinks the value of their bank will increase with the addition of your bank.

The buyers aren’t as interested in the past as they are in the future.

Finding the areas where the combination of two banks creates value greater than the sum of the parts can lead to higher deal value and increasing the buyer’s willingness to pay a premium.

This newsletter is meant to heighten your awareness level of strategic considerations, so you can think about what is suggested below and add anything that may be specific to your bank.

There are no right or wrong answers here.

Beauty is in the eye of the beholder, but it is very important to be aware of the possibilities.

We’ll begin with the following possible strategic considerations to get your thoughts flowing:

Does the target bank expand the acquirer’s geographic footprint?

If so, would the expanded footprint be in stronger or weaker markets?

Don’t get caught up with stronger or weaker meaning “good” or “bad.” To a fast-growing bank in a metropolitan market trying to fund the demand, a slower-growth market, which could be viewed as “weaker” but is rich with longstanding, highly diversified deposits would potentially be a desirable trait.

What types of customers will be acquired?

Retail/consumer, commercial, agricultural, residential builders, commercial real estate (investor property and/or owner occupied)?

At what cost?

Will the costs be direct costs or indirect costs, such as the direct costs associated with adding additional support staff to ensure regulatory compliance, that would occur if you were adding a substantial number of retail customers?

Indirect costs such as additional education if adding new lines of business such as agriculture lending or mortgage warehousing?

What are the costs both initially and over time?

An acquirer who is in a market where residential building is growing, who doesn’t have a residential construction function, may be able to gain the function in an acquisition to offset a planned expense in the future, saving that expense and lowering the cost of acquiring a residential construction portfolio going forward.

This could also lead to added mortgage lending fee income to an existing mortgage function or create the critical mass necessary to start one.

Is there a significant branch/market overlap that could lead to substantial cost savings?

Or are the branch/markets of the two banks complementary, lowering the future costs of expanding the branch/market for the acquirer?

Does the acquisition have the potential to enhance the overall franchise value?

Perhaps this is a larger bank with several locations throughout a region, but it is predominately in rural markets and the financial markets value the stock lower because the markets are slower growth. Perhaps an acquisition in a growing metropolitan area will be viewed by the financial markets as a positive whereas a lower loan-to-deposit bank, with lower cost deposits can deploy more loans and increase the earning power of the bank.

Are the two cultures similar?

In the bullet just prior to this, it was considered that a bank with a large, predominantly rural market base acquired a metropolitan bank.

This can be a strong combination under the right circumstances, but if the culture of the two banks is too different, it could cause the execution of the combination to go poorly and produce suboptimal results.

We’ve seen banks from rural markets enter the Kansas City area over the years to deploy deposits from those markets into loans in the growing metro area.

On paper, that looks like a great strategy.

In reality, though, some of those banks didn’t have any relationships developed in the market.

Without having long-standing relationships in the market, credit standards can be lowered just due to lack of knowledge.

Some of those banks loaned money to newly established home builders.

In most cases, that didn’t go well.

The financial crisis of 2007 hit and some of the builders went out of business and those banks followed suit.

That has created hesitation, in my opinion, by other rural market banks from entering the market.

I would argue that entry into the market through an acquisition of an existing, proven bank, with long-standing customer relationships would have produced different results.

That same thing could work in reverse.

Some may consider the cultural differences are the reason the combination doesn’t work, when in fact, it would appear to be an error in strategy.

Will the acquisition diversify or enhance the acquirer’s loan or deposit mix?

Will the acquisition diversify or enhance fee income opportunities?

Will the acquisition diversify or enhance the acquirer’s balance sheet?

Will the acquisition diversify or enhance the acquirer’s technology offerings?

Perhaps one of the two banks has an expertise in IT and the other may be a bit behind the times in their product offerings or internal efficiencies due to a fear of introducing cybersecurity risks.

Will the acquisition diversify or enhance the acquirer’s talent pool?

Will the acquisition diversify or enhance the acquirer’s succession plan?

Will the acquisition diversify or enhance the acquirer’s board?

Will the boards bring new areas of expertise together like a board member with an IT background or a board member with a background in human resources.

What other cost savings or revenue enhancements does this potential acquisition provide?

These are just a few thoughts to get ideas flowing. The strategic considerations are only limited by your imagination.

We’ll focus next week on talent-related strategic considerations.

Action plan:

• Take some time to reflect on the questions above.
• Take some time to think of some of your own questions.

There are zero hacks or tricks in this newsletter. Just proven tactics that help you choose the right path for your bank.

Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• Define your message so it can be communicated with confidence.

This is how savvy bankers navigate.

They build smart and valuable banks and choose the best time to sell – serving the needs of the shareholders and the board.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.