04 May Deposit Dilemma — A Playbook for Using M&A as a Proactive Tool to Solve Funding Issues
DEPOSIT DILEMMA A Playbook for Using M&A as a Proactive Tool to Solve Funding Issues
By Leonard J. DeRoma, Head of Liability Analytics
Virtually any financial institution with a high loan-to-deposit ratio or with funding challenges in today’s difficult and highly competitive environment for gathering and retaining deposits should at least explore M&A as a potential solution. The right acquisition can, overnight, provide the same amount of liquidity your bank can generate on its own over the next five years. However, pursuing acquisitions as a solution to the deposit dilemma must be done with diligent planning and a carefully developed process.
Simply expecting your investment banker to bring you deals is not how the process works best. As the CEO of an acquisitive bank, most M&A opportunities will be introduced to you in one of two manners:
- You get a call from the investment banker representing the seller (not your advisor, but the other bank’s advisor) inviting you to participate in a bidding process, and then you turn around and engage your own investment banker upon acceptance of that invitation.
- You create a transaction yourself by leveraging the relationships with other bank CEOs you have developed (also referred to as the ‘negotiated transaction’). Investment bankers and lawyers are brought in ‘after the handshake’ to formalize and process the deal.
It is important to note that the investment banker for the buyer is generally engaged after the opportunity has been identified. In fact, investment bankers tend to prefer it that way because they have a transactional business model. Their preference is to represent sellers because that is the equivalent of having a ‘bird in hand’, while representing a buyer without a committed seller means they are taking a risk of expending their time and resources without a guaranteed pay day.
In most situations, would-be acquirers participate in a bidding process (option number one above). Unfortunately, this approach severely limits the probability of a successful transaction with the right bank. First, you will only be reacting to banks that ‘are for sale’, irrespective of how they alleviate your bank’s issues. Unfortunately, most of the banks currently ‘on the market’ are banks in your footprint that have the same challenges with funding. Second, the chance of success is very low, since you are likely one out of 10 or so banks invited to participate in the process. Third, because it is “shopped” and in an auction situation the price will be high. Fourth and perhaps the most overlooked aspect of this approach is the ‘fatigue factor.’ Each time this type of an opportunity surfaces, it essentially diverts the time of key members of management to assess and analyze the opportunity, with most of their time wasted on unsuccessful bids.
The Missing Piece of the Puzzle: A Proactive Process
Unless you get lucky, the “opportunistic” M&A approach won’t end up with a successful acquisition of the right bank. Instead, a bank in need of deposits needs a well-defined strategy and process that leads to the highest quality transactions. The right playbook for developing an acquisition strategy looks something like this:
New Analytics and New Role for Management
Remember that the post-recession era, marked by the Federal Reserve’s unprecedented policy of quantitative easing, forever changed community banking. (See “Why it Makes Sense to Do a Deal Amid Depressed Bank Stock Prices, page 1.). Reversing these changes through traditional operating procedures is slow and ineffective, while M&A can be a powerful corrective tool for the deposit dilemma. However, using M&A to create the funding needed to grow and preserve loans, reduce liquidity risk, and maximize shareholder value requires a drastic shift in M&A analytics, the role of management and their investment bankers.
But you have a better chance of rapidly and significantly growing your deposit base using this new M&A approach than you do by trying to grow deposits organically with gimmicks such as points on checking accounts, toasters, or any other ‘hacks’ that are out there.
Investment bankers will continue to play an important and essential role. They provide necessary services associated with completing a transaction for the buyer, including acting as the ‘deal manager’ to gather up the target’s shares and provide a fairness opinion. But the structure and resources of most investment banks is geared toward transaction-specific actions. They were not organized or designed to focus on identifying and quantifying the unique financial and operating challenges faced by individual community banks.
The most valuable aspect of any successful transaction is the creation of the right opportunity that fits the holistic strategy of the bank. Without that, there is nothing to do but hope that the right bank comes up for sale. And hoping is not a strategy.
For information on the Invictus Group’s proactive M&A targeting service, please email MandA@invictusgrp.com