Buying and selling activity in banking was chugging along through February of 2020. The number of sellers was manageable, said David Stieber, an investment banker with Oak Ridge Financial, Minneapolis, and that created "a really good environment to feed bank M&A."
And just as life on earth as we knew it came to a screeching halt in March 2020, so too did bank M&A.
"Oak Ridge followed the publicly traded banks and saw a significant sell-off immediately when the coronavirus was declared a pandemic," Stieber said. "Upwards of 45 to 50 percent of stock value dropped." It was September 2020 before the stocks of smaller, publicly traded banks rebounded, he added.
In the first six months of 2021, there have been 122 bank deals announced. Annualized, this puts the total at 250 deals by the end of this month. M&A has its groove back, it seems.
Bank valuations are at or exceeding pre-pandemic levels. "We're seeing some very strong multiples for the right bank in the right market with the right management team," Stieber said.
By watching how small, publicly-traded banks are valued, the owners of closely-held banks can get an idea about how their institutions might be valued.
To succeed at bank M&A, whether as a buyer or a seller, one must strike a balance between having yourself organized and being opportunistic, said Craig Mueller, Stieber's colleague at Oak Ridge. Being opportunistic is "really what it takes," said Mueller; an unwilling seller is rarely a viable acquisition candidate.
"We had a banker come to us a little while back. Six months prior, he had been told by his board to go and do an M&A transaction," Mueller recounted. "He sent letters and visited all these banks, and six months later, nobody was selling to him."
At the Bank Holding Company Association's Fall Seminar, held in October, Stieber and Mueller engaged in an M&A-focused discussion with four bankers — two who work at banks that had recently made an acquisition, and two who led banks that had recently been acquired. Their conversation has been edited for clarity.
BUYERS PERSPECTIVES
David Ehlis, CEO
Bravera Bank in Dickinson, N.D.
Bravera Bank operates in North Dakota and Montana and has assets of roughly $2.5 billion. It specializes in ag and commercial lending, with a substantial indirect consumer lending business. The bank has a trust company with roughly $1.6 billion of assets, and a commercial insurance agency that does roughly $12 million in revenue per year. It is privately held with a diverse base of investors. There are slightly more than 350 shareholders, with two family groups owning more than 10 percent of the bank. Ownership representation in the boardroom is close to 70 percent. The bank is a C corp. Its most recent acquisition was the $135 million, three office Citizens State Bank in Finley, N.D., a deal that closed earlier this year.
John Ohlin, CEO
Deerwood Bank, Deerwood, Minn.
Ohlin describes the $1 billion, 13-location Deerwood Bank as a "simple community bank, with commercial lending and residential real estate." The bank has seven owners, with 90 percent of its shares held by three individuals. Ownership is 100 percent at the board level. Deerwood Bank has been owned by the Spalj family since 1997. Its most recent acquisition was of the $210 million Plaza Park Bank, Waite Park, Minn., which closed in April 2018. Deerwood just sold its Inver Grove Heights, Minn., branch to Royal Credit Union, Eau Claire, Wis.
Craig Mueller: How did you determine whether to add bank acquisitions to your strategy?
David Ehlis: Acquisitions are important to us because growth is important to us. We believe you have to continue to grow in order to defray all the costs and continue to have the profitability we want to have.
Within our senior management team, we have an acquisition strategy team. We're looking at potential targets we think would be a good fit from a geographic and balance sheet standpoint. We prioritize those into a list. We reach out proactively; it takes a long time when you do that. Typically, if someone's not for sale, they're not for sale. But start developing those relationships.
The other piece of it is having good contact with folks like Craig [Mueller] and Dave [Stieber]. We make sure they're aware of what we are looking at so when things do come to market that would be a good fit, we're included.
Our board is involved not so much in developing the strategy, but in approving the strategy. And of course they're involved in each individual transaction, ultimately approving them.
John Ohlin: We got involved in the acquisition side of things because the bank was acquired by a couple of brothers, fairly young, aggressive entrepreneurs who wanted to grow. They took a look at the Deerwood Bank franchise, and thought it would be a great model to take to other communities based on the success they had.
They also had a significant access to capital, which doesn't hurt. So they wanted to allocate that capital to other investments in other opportunities. The other portion that drives us is that we feel that we've got a management team, an acquisition team, that's really strong. We have the ability to take on more, to expand, and through a number of these acquisitions we've actually picked up talent. We've filled a gap. So it's been, from a HR standpoint, accretive.
As far as looking at opportunities, we continue to reach out to our centers of influence, attorneys, accountants, investment bankers. But it's one-on-one relationships, social relationships, getting to know your fellow banker, knowing what kind of their goals and objectives are for the future, sharing participations and what might give you a good understanding of how they do business. It's been all across the board. As far as a detailed strategic plan, it's something that's discussed, probably at the beginning of every board meeting, e.g., strategic initiatives and those types of things, but nothing formal.
David Stieber: What's the most important thing you look for as you're looking at targets? Is it the performance of the bank? Market geography? Management and people?
David Ehlis: Geography is certainly important. The market is important because it determines to a large extent how [the bank] is going to perform going forward. The culture and the people are super important. I'd almost rank that above anything else. Maybe it's not your criteria for selecting a market or a target, but if it's not a fit, then I do believe it's a reason to walk away or not do it, because it's going to be difficult afterwards.
John Ohlin: The returns are going to be the returns. Geographic location is important. Whether or not that financial institution has a complementary service, maybe something you want to get into — a brokerage or trust or insurance. But culture is huge, whether it's customer service or sales. The [acquisitions] where it's been easier to manage have very similar cultures.
David Stieber: What about employee retention?
John Ohlin: It is important to have key people stay on. Continuity of service, especially in the smaller markets, is really important. But it depends. Part of our analysis looks at where efficiencies are to be gained. And there are times when we already have somebody who we were confident in that can do the job who already understands our culture.
David Ehlis: I think the most important thing is that you have an understanding up front so that if there is going to be a transition of senior management, you can plan for it. And it's not always a bad thing. If the CEO owned the bank and owned it for a long period of time, it might be a little better, honestly, if he or she transitioned out in not too long a time. Because things are gonna change and, often, it's difficult. It's super important to keep key production staff. That's who the customers are tied to. That is something we work pretty hard at.
David Stieber: If you have 30 days, how do you determine if a culture is a good fit?
David Ehlis: Hopefully you already know them so you are not starting from zero. We spend a lot of time with them through due diligence. We make sure we have multiple meetings with the management team. Obviously confidentiality is a piece of it, so you can't meet everybody. And not just formal meetings; going out to dinner, that type of thing where you just get to know the people a little bit better. It's certainly a challenge, but I do believe if you spend the time that you can get a pretty good sense for it.
If you know someone is a target that you're interested in at some point (they may not be for sale), getting to know them through [loan] participations is a good way to make that introduction and see if you have a credit culture, which is a big part of culture. So if that's compatible, then a lot of other things are too.
John Ohlin: It's getting together on a social basis where people can let their guard down a little bit when you really find out what makes them tick. Loan participations. If you've got a target CEO with ownership, build that trust, build that relationship. This industry is still pretty small. We all know each other; we know how we operate. We see each other at the same meetings. You've just got to get to know them and really spend some time knowing that staff.
Craig Mueller: Have there been hiccups in the process?
David Ehlis: The hiccups we ran into have all been around culture and people. The other things you can find out about during due diligence. Obviously, things can change in a market, but I would say any hiccup has usually been people-related.
John Ohlin: I can assure you there are going to be hiccups. But you gotta work through them. If you've got a buyer and a seller who are willing to do the deal, you just plow through it and figure it out.
David Stieber: How do you look at deals from a financial perspective? Do you use an outside financial advisor or do you do all the analysis in-house? And regardless of who does it, what are the driving factors that you look at to price a deal?
David Ehlis: We use a combination of both. We have outside advisers and are doing it ourselves as well. A lot of that depends on the size [of the deal]. If it's a little bit smaller or more comfortable we are probably just doing it ourselves. We look at the internal rate of return. We look at payback of the premium and earnings accretion. When you model it, the growth can affect the model quite a bit.
John Ohlin: ROE, internal rate of return, payback. Our modeling is done internally. We have a real strong CFO in whom I have all the confidence in the world. She's looking at things. We know our costs. We know what our costs should look like after an acquisition. She can model those really closely. As far as valuing loan portfolios or deposit premiums and that good stuff, we're going to go outside for those things.
Craig Mueller: Talk about communicating news of a deal. It's obviously a very touchy situation. Tell them too soon and you risk losing people; don't tell them the right way, and you have the same risk. How do you approach communication with the target bank?
David Ehlis: Communication is super important. I don't think you'd like to see it where they find out the day you file for regulatory approval. The senior executives would get brought in even as part of the due diligence process. To the broader employees [tell them] before it becomes public. That is usually done first by the seller. And we usually make a trip very shortly after that to meet with the employees so that they start to put a name to a face and learn who we are.
Right after it goes public is when we would have the sellers reach out to key customers, especially the larger clients. And we'll even make a visit to some of those customers as well.
Craig Mueller: As a potential purchaser, what recommendations do you have?
David Ehlis: The financial analysis and the due diligence is more identifiable and more measurable. But culture is super important. So spend time on that.
John Ohlin: You can change the financial piece (and your due diligence identifies a lot of that stuff), but culture is No. 1 — whether it be with the individual, with customer service, sales or credit.
SELLERS PERSPECTIVES
Dan Riebe, former CEO
Peoples Bank Midwest, Eau Claire, Wis.
The $360 million Peoples Bank was founded in 1991 by Michael O'Meara. It expanded into Eau Claire in 1996 and into the Twin Cities in 2007. Despite wanting continued growth, the bank stalled. "We couldn't find markets to start in and couldn't find banks to buy," Riebe said. "We had plenty of capital and started talking to folks about maybe buying, but it seemed like the prices were really high."
None of O'Meara's children were interested in running the bank, and the pair knew it would take 10 years to prep the bank for sale should another recession occur. "And then we were on the sell side," Riebe said.
Royal Credit Union, an active acquirer that is also based in Eau Claire, came to mind as a possible buyer. Of a potential sale to a credit union, Riebe called himself "enough of a libertarian" that he wouldn't object to a sale to a credit union if that's what the owner wanted. At that time, however, Royal wasn't active in commercial lending, which was largely Peoples' focus. "I think it would have been a big bite for them on the commercial lending side, and I don't think it would have been best for our staff," Riebe commented. Ultimately, the bank was purchased in 2019 by another serial acquirer: Arden Hills, Minn.-based Frandsen Financial.
John Malmberg, former CEO
First American Bank of Hudson, Wis.
First American was part of the de novo class of 2007. Its ownership was broad; only one shareholder held more than 10 percent of the shares. Malmberg said the bank grew very rapidly at first: "There were eight charters and two credit unions in Hudson, and within three years we were the second largest bank in town."
First American acquired Great Northern Bank of St. Michael, Minn., in 2013.
When the Great Recession struck, growth stopped. The bank operated as an S corp, and it had shareholders who wanted liquidity. The bank wasn't able to give those shareholders the price they would get if they sold the bank. It ultimately opted to sell. "We wanted to sell to a community bank because we felt that that would be best for our employees and best for our customers. That's what we ended up doing," Malmberg said.
First American's eventual sale happened in two stages. The St. Michael branch went first, in 2017. The top bidder was a credit union. The board approved that sale, but a week before the deal closed, the credit union backed out. The No. 2 bidder, Community Development Bank in Ogema, Minn., was easy to work with, Malmberg said; it kept the branch's entire staff.
In 2019, First American sold its original Hudson bank to Lake Shore III Corp., Glenwood City, Wis., the parent of Hager City, Wis.-based Hiawatha National Bank and Blair, Wis.-based Union Bank of Blair.
Craig Mueller: How involved in the sale was your board?
John Malmberg: Our board was very involved. We had the three ex-managers on our board and they were greatly attuned to the market. Our board was involved in the discussion phases during the entire process.
Dan Riebe: Our board has incredibly smart business people, but they weren't bankers. Right up until the end, our owner wanted to have the ability to say, "I'm not going through with this."
The bank was making a ton of money and I guess all business people say the best time to sell is when you don't have to. So just to make sure that nobody got too excited if we decided not to go through with it, I guess our board was probably a little less active than most.
Craig Mueller: Did your board consider only cash deals, or were they open to stock deals?
John Malmberg: We just considered cash [offers]. We had a lot of investors that wanted liquidity. I asked a lot of them if they would like to have a stock, but only two or three of them thought about it, and they were very small investors, so it just was not a major factor.
In the case of the St. Michael winner, it was a credit union, which none of us were really happy about. But we talked about having a fiduciary responsibility to the board to get the best price for our shareholders, and it was the best price. But as things progressed, they looked at the credit union, looked at us again and said, you've got too many commercial loans. Well, they could have figured that out very quickly, but they didn't. They walked away about a week before we were to close on the sale.
In Hudson, a credit union ended up as the No. 2 buyer and, actually a better buyer because our No. 1 buyer needed financing, needed to raise some capital, whereas the credit union had cash at hand.
Dan Riebe: Like everything, we had to consider it. Unless there was an immediate liquid market, my shareholders said, "I've got something that I control right now. Why would I trade what I have for something I don't control?" It's hard for someone to say, "let me take a real significant interest in a company that I'm not going to control."
As a private company with all stock owned by Mike [O'Meara], they could do whatever they wanted, whether it was the price, what happened to the staff or what happened to the communities or what happened to the clients. Thankfully, we think we covered all four bases with our sale.
Craig Mueller: Talk about communicating news of a deal. It's obviously a very touchy situation. Tell them too soon and you risk losing people; don't tell them the right way, and you have the same risk. How do you approach communication with the target bank?
Dan Riebe: Every situation is different. If you know you're going to sell, why wouldn't you bring your senior group in early? Our situation was a little different; it was a very tight group up until credit due diligence. Once we narrowed one [buyer] down, we brought the senior group in, because they're not dummies; they can figure things out.
We brought the rest of the group in once the purchase agreement was signed. We went around to each office and had a staff meeting and told them what we were doing, why we thought it might be good for the staff, our communities, our clients, and our shareholders. I don't know if that's the best way to do it but that's how we did it.
John Malmberg: Presale, communication was very good. They met with all of our staff and met with the senior people one-on-one. We introduced them to our largest customers. They went on calls with us with the largest customers, and sat in our loan committee for the last month prior to closing. I thought the whole process went really quite well. By doing that, our employees felt comfortable and our customers felt comfortable.
David Stieber: What about employee retention?
Dan Riebe: Our group had a very strong allegiance to our owner that we wanted his deal to happen. So we were going to be pretty agreeable to work with because he had been so generous to us through all the years.
They're buying a revenue stream. If they don't have the revenue producers locked down, what are they buying? So it was kind of a mutual, "Hey let's figure this out because if this doesn't happen, a sale's not going to happen."
We started bringing the key producers in to say, "To make this happen, you're going to want to sign on. This is why we picked this buyer because we think it's good for everybody: Staff, community, clients and shareholders."
John Malmberg: We had no [employment] contracts in our bank whatsoever. We felt if people didn't want to work for us, they didn't have to. And we didn't really have any turnover. Prior to us getting involved with the buyer, the first one at the branch level, they did want stay bonuses for a number of the key people. And we did. When we sold the Hudson location, the buyer had no concern about anybody leaving. Two of us were given a non-compete for two years.
Craig Mueller: How did you keep the deal confidential?
John Malmberg: When you get a bank out there and you have a lot of people looking at it, and they see the asset size and they see a number of things about it, they kind of put two and two together. I got some calls asking: "Is that you?" And all I could say was, "I can't comment," which of course meant, "yes it is."
Dan Riebe: We had very few people in the organization involved mostly because we had a lot of the things electronically. Our credit displays were available electronically, so we can narrow it down to the final couple of bidders and they could essentially do credit due diligence offsite. They're going to have to come in and verify that everything you put in your credit display is actually supported by fact. We were very close to a purchase agreement once there was on-site due diligence.
There are a lot of parties involved, a lot of accountants, a lot of attorneys, a lot of investment bankers, and everybody tries to be honorable, but everybody is pressing for information. I thought our group, those accountants, attorneys and investment advisors were wonderful.
Craig Mueller: Have there been hiccups in the process?
John Malmberg: The buyer for St. Michael kept the entire staff. I thought it was a very good deal. When we sold the Hudson bank, the buyer told us that our staff would have so many opportunities that they didn't need any sort of stay bonuses or anything like that. That didn't work out and we probably should have done a little better job looking at the culture differences because about a year and a half later, there are two employees left out of 22.
Dan Riebe: Not really.
Craig Mueller: Knowing what you know now, what would you do differently? What advice do you have?
John Malmberg: In our document purchase agreement, there were certain timeframes that everybody had to meet to do things. Our buyer missed them all and everything dragged on and on. At the very end, we had a drop dead date and we had done so much already that even if they missed the drop dead date, we still wanted to get the deal done. We had canceled our core processing agreement to coincide with closing and we almost had to go on a month-to-month with Fiserv.
Dan Riebe: I don't think we'd have changed anything. We had a buyer who has a lot of money and so they could get a deal done. And they had a lot of experience in getting deals done. So once a deal was made, it went right according to plan.
