(512) 557-2265 ralphdowling@gmail.com

A challenging but effective path to increase shareholder value

Ralph Dowling

President, Bankpoint Consultant


Executive Summary

The value of small community bank stocks appears to be in flux and in danger of trending downward particularly in institutions with marginal earnings streams and minimal market growth possibilities.  The recent trends in M and A markets reflect a decline in activity, particularly among banks in the under $400M in asset size group.  Volume is down significantly over the last 18 months as upstream aggregators tend to be merging with like-sized institutions.  Examples include Howard Bank/FRB, Cadence Bank/BancorpSouth, and Happy Bank/Centennial mergers.  Several of these financial institutions were previously active players in the roll-up of smaller institutions.  They may return as post-merger participants but their absence from the acquisition side of the equation is likely to impact the short to mid-term value of community bank stocks.  That said, core economics principles will come into play at some price point and activity will resume.

Owners of small community bank stocks may experience concerns about their exit strategy and stock liquidity now that larger and mid-sized institutions appear reluctant to engage in “one-off” small bank purchases.  Concern may be magnified by maturing ownership, boards of directors, and management.  Increasing overhead regulatory cost combined with technology competitiveness raise additional questions about the cost effectiveness of the small bank model. Perhaps it is time for boards and majority shareholders to reconsider the prospect of the mergers-of-equal process as a method to enhance organizational growth and shareholder value.

Mergers of Equals

While conceptually the banking industry and investment bankers have touted mergers of equals as an economical method of growth, shareholder enhancement, and liquidity, successful results in this area have been limited.  Industry insiders have reached the conclusion that “social” factors may often prevail over economic considerations, thus limiting the possibilities of this potentially dynamic merger option.  Others maintain that a MOE is an oxymoron.  That is, one of the two organizations will prevail as the dominant player.  One of the headquarters is likely to experience significant staffing reductions.  This increases the likelihood that the previously referenced “social” factors could be a deterrent.  While these factors are a significant challenge, many institutions have achieved value enhancement utilizing this method.

Mergers of equals are generally predicated on a stock for stock exchange performed by two institutions, often in adjacent or complementary markets.  Herein lie some of the initial barriers for a successful transaction.  Historical competitive factors may provide a perception of territorialism and magnify the social factors that may act as a deterrent to the transaction.  Branding is one of the first significant challenges.  As with other factors of this nature, it is essential for board members to check personal considerations at the door from the very beginning and that conversations focus on shareholder possibilities and the success of the process.


The initial determinate considerations are the combined currency considerations.   Privately held organizations are challenged to bring liquidity to the table.  Currency is a function of the demand, price and liquidity driven by the market for the respective stocks.  This is primarily an investment bank recommendation, although the number of shareholders may also be a factor, particularly in older institutions with fractionalization ownership.  This factor may drive a cash option for a portion of the transaction, particularly if one of the bank’s has “excess” capital.  This may be an attractive feature, particularly if this group of smaller shareholders is willing to participate at less than the “peg” exchange rate.  

Transaction cost, regulatory considerations and other hurdles may also be deterrents.  The public mid-size bank platforms provide a more efficient exchange mechanism than a private exchange MOE.  While OTC Pink and OTCQX provide some basis for stock activity, trading volume is generally too limited to provide an effective platform for transactions of this nature.

Governance Factors

While investment bankers should assist as the primary determinates of the acceptable exchange rate for their respective clients, the secondary factor of board and management considerations is the driving consideration.   Pro forma discussion of the board composition needs to occur early and often in the process.  Vested interest of the shareholders needs to be the primary consideration of the new board and the designated negotiation team. One strategy that merits discussion is that of a “Community Board.”  This role may assist in addressing some of the referenced social factors at the board level.

Social Factors

While an MOE should be an economic process, historical factors should not be overlooked.  Branding is number one in this process.  Rebranding may assist in overcoming resistance to change and provide a new “look” for the organization.  Employee factors are also a major consideration, particularly in small communities.  Regardless of severance packages and salary adjustments made in order to “blend” the organizations, some employees may perceive inequity. 

One possible approach is to engage an outside consulting firm specializing in industry wages and salaries to provide a recommendation on the appropriate blend.  We have witnessed the success of this approach as a mitigating tool to avoid conflict and achieve equity.  The human resources consideration should be a high priority as it will be a factor in post-merger productivity.

Consolidation of Cultures

While “bonding” may be a challenge, the new organizational chart may be an even greater challenge.  Starting at the top, it is challenging for an organization to operate with two CEOs.  It is also difficult to simply combine boards.  These factors may significantly impact the cultural factors as well as effectiveness and efficiency of the new organization.  Once again, social factors create organizational/merger risks.

Overlapping Markets 

Even among smaller banks, overlapping markets may be a challenge. Customers are often resistant and suspicious of change.  Small town markets and pocket communities value the identity of their “BANK.”  Communication with customers beyond press releases and social media are needed. Meetings and “pressing the flesh” are preferable to ensure retention of your most valuable asset, that is, your customers.  Finally, depending on the combined market share in certain areas, there may be regulatory considerations.  

The Process

My role is to work with both parties until an agreement is reached and implemented. An outside advisor may decrease the risks of miscommunication while assisting in communication between boards, management, employees and customers.  The recommended process should start with the appointment of a small, nimble board committee and the identification of a strategic target for a merger. As previously noted, the IB’s should perform the economic analysis for exchange however we recommend that guidance through the “social” factors be the primary role of this consultant and his affiliates.

Mr. Dowling has been involved as a consultant, CEO and board member on numerous mergers, financial institution sales, and MOE transactions. He and his group of affiliated consulting firms can help your organization explore the possibilities of going to the next tier in an industry where shareholder value and size are increasingly tied together.