M&A as a Competitive Advantage for Community Banks

The competitive spirit is a driving force that pushes each of us to reach unimaginable heights. It’s also what makes sports stories so endearing – particularly those where an underdog overcomes great obstacles to win.  I particularly like this quote from Rocky Balboa (Sylvester Stallone) in the movie Rocky: 

“You, me, or nobody is gonna hit as hard as life. But it ain't about how hard ya hit. It's about how hard you can get hit and keep moving forward. How much you can take and keep moving forward. That's how winning is done!”

In a lot of ways, community banks are the Rocky Balboa of the banking industry. They are taking hits from increased competition, heightened regulatory oversight, generational shifts, and a decade-long low interest rate environment. As a result, a number of them are looking for an exit strategy.

Don’t count them out just yet. No one knows customers better than a community bank. While these banks are in the ‘ring’ fighting off obstacles from every corner, they have to remember their unique competitive advantage. The focus on clients and community will always represent a winning strategy.

As part of that community focus, more and more banks are pursuing M&A as a part of their growth strategy. Whether on the acquiring or seller end of the deal, the motivation is due in large part to a few hard trends:

1. The increasing demand for economies of scale to meet the growing regulatory burdens (compliance, costs, and complexity) and growth pressure.
2. A generational shift in the consumer/employee base and a lack of succession planning/talent development that is causing more consolidations to be mandatory, rather than optional.
3. Need for greater knowledge/wisdom in navigating the industry’s growing complexity and successfully identifying the right opportunities for growth.

Four Considerations for Banks Engaged in M&A

Strategic Planning

Start with a vision for the culture you want to create and the impact you want to have on clients and communities. Understand that a successful growth strategy is not something that you build overnight. Assembling a team of knowledgeable internal and external advisors will help to make sure all risks and opportunities are considered as you nurture that strategy over many years.

The Who & Why

Once you have set the course for your future, it’s even more important to evaluate and understand what qualifies as an ideal growth opportunity.  Think of this as “The Who & Why.” Who are your target opportunities? Why do they qualify as a strategic fit to your bank? Recognize that the fit could take the form of product lines, customer base, geographic footprint and/or depth of expertise.

Deal Structure

Negotiating a deal structure that’s a win for both organizations starts with both banks understanding the needs of the other. There is much greater focus on profitability in today’s environment. The acquiring organization is likely to be keenly interested in any deal that preserves capital, minimizes tangible book value dilution and quickly creates earnings accretion. It’s easy for the seller to get caught up with multiples of book value. What both parties should look for in the deal is long-term value for all shareholders.

Trusted Relationships

Something you don’t hear discussed much is the importance of building relationships with the executive management teams of peer banks. In the HORNE webinar “Charting the Course for Intelligent Growth” we highlighted the success story of Renasant Bank of Tupelo, MS. Their executive management team highlighted how important relationships are to the success of their growth strategies. Relationships have been a key element of their in-market acquisitions, new market acquisitions, new product line acquisitions and de novo branches in new markets with management lift outs.

Does your bank have a disciplined focus on growth? Is a merger or acquisition part of your strategy?

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