Why Bank M&A Is About People as Much as Numbers

Here's a secret for drafters of bank deal announcements: Our eyes glaze over when we read the superlatives you choose to describe how well your corporate cultures are going to mesh.

We find such language in nearly every merger announcement, even though it risks coming off a tad self-evident. Of course the banks’ cultures will mesh; most deals involve two small institutions in similar markets — not AOL and Time Warner.

What we focus on instead is the money and the numbers. The more arcane, the better for AmericanBanker.com’s M&A page, which is approaching its second anniversary.

Our bread-and-butter stories often wallow in the math. We tend to write beyond our art history minors and cover things like investors warming up to the idea of longer earn-backs on tangible book value dilution, or the structuring of investments around change-of-control rules to preserve the deferred tax asset.

Impressive, right?

To a point. What such coverage overlooks is the human element, which has been central to some of our favorite stories over the past two years. Often they’ve involved the personal relationships buyers and sellers have built and the old-fashioned persistence it’s taken to complete transactions.

The targets of most deals are community banks, and the decision to sell is often the first foray into M&A by the bank's officers and directors. Often, what’s gotten them there is fatigue following the financial crisis. No matter how tired they are, however, officers and directors must feel comfortable with the buyers before doing a deal. After all, local jobs, the futures of loyal employees and, sometimes, family legacies are on the line.

That brings to mind comments last year of John Keach Jr., then the chief executive of Indiana Community Bancorp, after announcing its sale to Old National Bancorp (ONB) in Evansville, Ind., for $79 million.

"That's obviously one of the most difficult decisions I have ever made professionally," he said about deciding to sell the bank that his father and grandfather had led.

The human factor shone through again this month when we examined the reasons behind Heartland Financial USA’s (HTLF) agreement to buy Morrill Bancshares for $751 milllion.

The ball was set in motion by credit officer Nick Reitzler, who had left Heartland in Dubuque, Iowa and gone to work for Morrill outside of Kansas City, Mo. Reitzler, invited his old boss, Heartland CEO Lynn Fuller, to meet his new boss Kurt Saylor, Morrill's chairman and CEO, at a Morrill customer event in September.

Fuller and Saylor kept talking over the following months.

Saylor, 61, and his brother, Vice Chairman Kent Saylor, 66, knew the next generation of the family was not interested in taking over the family-owned bank, which is said to hold the oldest bank charter in Kansas.

"We weren't looking for a deal, but we saw the value of hitching our wagon to Heartland," Saylor says.

Fuller said in an interview that he was proud his three previous deals were negotiated transactions and not auctions.

The adage is that banks (like most financial products) are not bought but sold. Perhaps a more apt way to phrase it is that banks are not sold; it’s more that sellers are tired of saying "no" at the end of lunches. 

That is what Walt Kaczmarek, CEO of Heritage Commerce (HTBK) in San Jose, Calif., seems to be counting on.

The $1.4 billion-asset company's effort to bulk up in six counties around the San Francisco Bay is a methodical process, he said at a conference in May.

Kaczmarek said he is working "the luncheon circuit" for prospects, meeting the same seven to eight bankers on a regular basis to discuss the possibility of buying their banks.

Yet breaking bread can drift into some back-of-the-napkin math, especially regarding what prospective sellers think their banks will fetch.

Sellers' price "expectations have come down" as reality has set in, but "there is still a little spread there, don't get me wrong," Kaczmarek said.

Eliminating that spread is the point at which the math and human element finally come together.