Growth-minded community banks want to maintain a small-bank feel as they bulk up, but it is often easier said than done.
Scale is the objective for numerous management teams aiming to offset compliance costs and revenue constraints. As a result, many banks that once focused on a handful of markets in their home state have evolved into regional players with operations that stretch beyond their traditional borders.
Such growth has a level of risk. To prepare, executives need to make sure they are up for the task of running a larger institution and that they have the right systems in plan to support such growth, industry experts said.
"It's too difficult to organically grow fast enough to get to the size you need to compete and perform at a level that investors are expecting," said Bob Kafafian, president and chief executive at the Kafafian Group. "That's why we're seeing more and more mergers of similarly sized banks. These banks are trying to double themselves."
Some bankers believe that the best way to grow is through one large deal rather than stringing together a handful of smaller transactions, each with its own set of execution risk, said John Depman, national leader for regional and community banking at KPMG. Others have grown quickly since the financial crisis by becoming serial acquires.
Bankers, regardless of their growth plan, must have a deft hand at integrating their transactions, Depman said. This means adopting the best practices from both the buyer and seller.
"A fatal flaw is saying, 'We're the acquirer, we're better and we're in charge,'" Depman said. "The other bank may have some things that are working well. After all, you found them attractive for some reason."
Take Bar Harbor Bankshares in Maine for example. The $1.6 billion company will double in size after it buys Lake Sunapee Bank Group in Newport, N.H. The deal will also introduce Bar Harbor to new markets in New Hampshire and Vermont.
The deal was appealing due to a lack of branch overlap and complementary strengths at the institutions, said Stephen Theroux, Lake Sunapee's president and chief executive. Bar Harbor is more efficient and has a bigger commercial lending platform; Lake Sunapee has a large mortgage operation and $1.5 billion in trust assets under management.
Bar Harbor had already been investing in its systems and people so it could become larger, said Curtis Simard, who joined the company in 2013 as president and chief executive with a plan that involved acquisitions. Lake Sunapee was attractive because it had a similar culture and operations in key markets with growth opportunities, he said.
"We're unlocking the potential of two banks," Simard said. "We will be broadly known across three states and will be able to leverage our similar cultures. There are all sorts of benefits from becoming a larger institution."
Integrating such deals can be tricky, said Ken Siegman, senior director in West Monroe Partners' banking practice. Sometimes a buyer fails to fully integrate the banks, leading to a scenario where the institutions continue to operate separately while missing out on chances to make bigger loans and cross-sell products, he said.
An executive review process is an essential, though often unpleasant, task. Doing so may mean putting executives from a selling institution into key roles while shuffling people at the acquirer into different posts. Such decisions could lead to employee defections, but they are often critical for building the best team, Siegman said.
"You will have a problem if you don't recognize upfront that as the bank grows … you can't run it the same way," Siegman added. "Different management skills are needed. It would be unfortunate to pass up the chance to build the strongest management team possible."
It is equally important to make sure key employees feel secure and respected, Depman said. Employees often seek work elsewhere if they become concerned about job security.
"People are your best asset," Depman said. "You need to make them feel as if they're part of the transformation."
Investing in technology, systems and products is also important.
Bar Harbor, for instance, has already added products, like commercial cash management, that are designed to retain and attract clients who typically belong to a larger institution, Simard sad.
Community bankers sometimes fail to change how they manage their organization as it grows, industry observers said. They may struggle with delegation, which can complicate situations where a bank needs executives to serve as market or regional presidents, Kafafian said.
Delegation shouldn't be a problem for Bar Harbor, said Simard, noting that he spent much of his banking career at larger institutions such as TD Bank where it was necessary to rely on others for help. Bar Harbor also added a new management tier two years ago to allow senior executives to reassign more tasks as the company grew.
While Bar Harbor is focused on completing its deal for Lake Sunapee, more deals could take place in the future, industry experts said.
While expanding into Massachusetts – possibly Boston – would be a natural progression, neither Bar Harbor nor Lake Sunapee would have been equipped for such an expansion on its own, Theroux said.
"You have to keep improving," Theroux said. "You do that by growing while keeping your roots in mind."