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The Misconceptions of Private Bank M&A

Last week, Kevin Strachan joined me in the podcast studio to discuss the ability of privately held banks to use their securities as consideration to acquire another institution.

Sadly, since the last time we recorded a podcast, the patriarch of our banking practice, Walt Moeling, passed away.  Our previously posted memorial included several links to remember Walt, but of particular relatedness to the podcast, we encourage everyone to listen again to two earlier podcasts with Walt sharing his wisdom.  In December 2016, Walt joined us on the podcast to discuss, among other things, the future of the banking industry and what one regulatory change he would make if given unlimited power. Then, in March 2017, Walt spoke about establishing a sustainable sales culture.

Somehow, I was able to read the notes I had scribbled about Walt, and we then continued to discuss two common (and contradictory) misconceptions on private company merger and acquisition activity. 

The first misconception is that privately held companies can’t issue stock as merger consideration.  The second misconception is that privately held companies can issue stock without restriction as merger consideration.  We regularly hear both of these misconceptions when advising private companies on a potential merger transaction where they are looking to issue (or receive) private company stock.  While neither of these ideas are correct, the truth is messy and usually requires further discussion.

Among the topics covered with Kevin in this episode of The Bank Account are:

  • the additional flexibility of banks without holding companies (and the limitations of that flexibility);
  • SEC registration via merger;
  • Regulation A+ in mergers;
  • the state Fairness Hearing exemption; and
  • using Rule 506 of Regulation D to issue securities to the target shareholders.

For private companies considering an acquisition of another institution, further conversations with investment bankers and lawyers are almost certainly going to be needed, but this episode of The Bank Account can give you a head start in understanding some of the potential options that may be out there.

Please click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

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Board Cohesiveness During Merger Consideration Process

Bank merger activity is reducing the number of U.S. banks at a rate of about 5% per year. It’s unclear how long this pace of industry consolidation will continue. Investment bankers, who have an interest in the level of activity continuing, are often quick to counsel bank boards of directors that the merger market may never be better than it is right now. Each year, the boards of hundreds of banks decide to heed the advice of those suggesting it’s time to sell.

Image by Gerd Altmann from Pixabay

A decision to sell a bank is one of the two most important decisions a board addresses (the other being selection of the CEO in a succession process). The strength of a board lies in the manner in which it approaches such a decision. Some boards will have gone through a lengthy process of reaching consensus before exploring potential merger opportunities. Others will find themselves considering unexpected merger offers without first having reached consensus. Vigorous debate can be healthy and productive in the process of a board reaching the best decision for the bank and its shareholders. Regardless of the circumstances in which a potential sale or merger of a bank is being considered, it is critical that all board members have access to the same level of information and be able to provide input throughout the process.

When board members believe they have been kept out of the loop on information flow, or they haven’t been adequately involved in considering a course of action, the strength of a board is undercut. Decision making is often adversely impacted as a result. This is particularly true in connection with consideration of the sale of a bank. Throughout the process of a board investigating options and considering strategic alternatives, the board members should have confidence that they are privy to all communications of importance with both professional advisers and potential merger partners.

We have seen far too many instances in which a director, on his or her own initiative and without authorization from the board as a whole, embarks on private outreach to potential merger partners. These directors usually feel justified in such action as a result of frustration with the pace at which the full board is moving or a sense that the CEO is resistant to the idea of selling the bank. Whatever the driving force, such independent action by a director can result in a breakdown in trust among the board and rarely results in a successful merger transaction.

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All Dressed Up with No Place to Go

All Dressed Up with No Place to Go

November 3, 2017

Authored by: Robert Klingler

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I discuss the prospects and alternatives for a small bank that finds itself without an interested buyer.   Frequently, we are finding clients and other depository institutions that have reached the internal decision that it’s time to sell, but when they check the market, the anticipated buyers are either not available, not interested, or at least not as interested as expected/hoped.

Before getting to those topics, we have a brief foray into me trying to avoid talking about college football, as well as updates on the proposed tax reform act and the announcement of the appointment of Jerome Powell to serve as Chair of the Federal Reserve Board.

Among the alternatives discussed:

  • A sale to a credit union;
  • A sale to a non-bank buyer;
  • A merger of equals, strategic merger, or stepping stone transaction; and
  • Longer term planning to set up the bank for a future sale.
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Dealing with an Unsolicited Offer

On the latest episode of The Bank Account, in preparation #SharkWeek, Jonathan and I discuss unsolicited offers and some of the approaches for bank boards to deal with them.  Topics covered include:

  • Senator Warren’s declaration that OCC Acting Comptroller Keith Noreika is a “swamp thing;”
  • unsolicited versus hostile approaches;
  • approaches to sell a bank, including full auctions, limited auctions, and negotiated transactions;
  • the need to have a current strategic plan and an understanding of the financial impact of such plan;
  • the-bank-accountthe value of having a Policy for Corporate Change to ensure discussions about offers to acquire the bank find their way to the boardroom for discussion by the full board;
  • dealing with an unsolicited offer in the middle of a negotiated transaction; and
  • the value of having experienced advisors, like Bryan Cave LLP, at your side as you address these issues.

You can also always follow us on Twitter.

Jonathan is @HightowerBanks and I’m @RobertKlingler.  Our producer, Sam Katz, is @SamathaJill1.

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Midyear 2017 Banking Review

Midyear 2017 Banking Review

July 7, 2017

Authored by: Robert Klingler

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I discuss some of the key trends from the first six months of 2017 with regard to the banking industry.  Topics covered include:

  • stock market performance (banks down for the six months, but still way up over the last 12 months);
  • merger and acquisition activity (same number but larger than last year, plus a more in depth look at North Carolina);
  • de novo activity (or lack thereof);
  • regulatory relief (and definitely lack thereof); and
  • capital raise activity (going strong).

We also congratulate each other on finishing the Peachtree Road Race (Jonathan’s first, my fiftheenth) and Jonathan shares a story where he seems to have exchanged an unfortunate woman’s micro-humiliation related to a debit card denial to a larger humiliation due to poor interpersonal skills.  With this episode we are fully switching to our summer schedule, so the next episode will be in a couple weeks.

You can also always follow us on Twitter.  Jonathan is @HightowerBanks and I’m @RobertKlingler.  I promise to try to restrain Jonathan from humiliating you on Twitter in the event that you decide to follow us.

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FRB Lifts Threshold for Financial Stability Review

In its March 2017 approval of People United Financial, Inc.’s merger with Suffolk Bancorp (the “Peoples United Order”), the Federal Reserve Board eased the approval criteria for certain smaller bank merger transactions by expanding its presumption regarding proposals that do not raise material financial stability concerns and providing for approval under delegated authority for such proposals.  The Dodd-Frank Act amended Section 3 of the Bank Holding Company Act to require the Federal Reserve to consider the “extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system.”

In a 2012 approval order, the Federal Reserve established a presumption that a proposal that involves an acquisition of less than $2 billion in assets, that results in a firm with less than $25 billion in total assets, or that represents a corporate reorganization, may be presumed not to raise material financial stability concerns absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risks factors.  In the Peoples United Order, the Federal Reserve indicated that since establishing this presumption in 2012, its experience has been that proposals involving an acquisition of less than $10 billion in assets, or that results in a firm with less than $100 billion in total assets, generally do not create institutions that pose systemic risks and typically have not involved, or resulted in, firms with activities, structures and operations that are complex or opaque.

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Economies of Scale Encourage Continued Consolidation

The Federal Reserve Bank of St. Louis just published a short summary of research by economists with the Federal Reserve Bank of Kansas City concluding that compliance costs weigh “quite a bit” more heavily on smaller banks than their larger counterparts in the community banking segment.  Looking specifically at banks under $10 billion in total assets (where additional Dodd-Frank-related burdens are triggered), the study found that the ratio of compliance costs as a percentage of total noninterest expenses were inversely correlated with the size of the bank.  While banks with total assets between $1 and $10 billion in total assets reported total compliance costs averaging 2.9% of their total noninterest expenses, banks between $100 million and $250 million reported total compliance costs averaging 5.9% and banks below $100 million reported average compliance costs of 8.7% of non-interest expenses.

While nominal compliance costs continued to increase as banks increased in size (from about $160 thousand in compliance expense annually for banks under $100 million to $1.8 million annually for banks between $1 and $10 billion), the banks were better able to absorb this expense in the larger banks.  Looked at another way, the marginal cost of maintaining a larger asset base, at least in the context of compliance costs, decreases as the asset base grows.

With over 1,663 commercial banks with total assets of less than $100 million in the United States as of March 31, 2016 (and 3,734 banks with between $100 million and $1 billion), barring significant regulatory relief for the smallest institutions, we believe we will continue to see a natural consolidation of banks.  While we continue to believe there is no minimum size that an institution must be, we also consistently hear from bankers in the industry that they could be more efficient if they are larger… and the research bears them out.

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Hightower Explores Intersection of Fintech and Bank Mergers

Atlanta Partner Jonathan Hightower authored a BankThink piece in the American Banker on May 9, 2016 titled “Don’t Ignore This FDIC ‘Request for Comment.’”  The discusses FDIC Financial Institution Letter FIL-32-2016,  which asks for comment on the agency’s plan to explore the economic inclusion potential of mobile financial services.

Jonathan notes “banks’ focus on mobile products not only provides innovative benefits to underserved consumers who may lack branch access, but in light of regulators’ interest in the potential for mobile technology to expand economic inclusion, this focus may also help institutions overcome regulatory and community-based challenges to mergers.”

Click here to read the whole article.

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