Banks formed to champion a specific cause can find it challenging to pursue acquisitions.
Culture is a critical component of successful mergers. A perfect fit is even more critical to banks with a specific mission, whether that involves causes such as social equality or environmental sustainability.
Values-driven banks such as First Green Bancorp in Mount Dora, Fla., Beneficial State Bank in Oakland, Calif., and New Resource Bank in San Francisco are all facing pressure to boost profit in the face of low interest rates. But they have much fewer acquisition opportunities than more traditional banks.
Mission Control: The M&A Struggles of <span style="white-space: nowrap">Cause-Focused</span> Banks"The main issue to address is the value proposition," said Ken LaRoe, chief executive of the $411 million-asset First Green, which focuses on environmental issues. "There's no one else in Florida that has this [cause] at the core of their DNA. I don't think acquisitions will be easy."
First Green said in May that it had hired veteran Florida banker Keith Costello to run its bank so LaRoe could focus on expansion and acquisitions. The company even hired an investment bank to help it look for opportunities. LaRoe, who declined to name the firm advising his bank, said he hopes to reach $1 billion of assets by 2020.
First Green, formed in 2009, has long been interested in doing deals but had been unable to pursue them due to limitations on de novo banks, LaRoe said. First Green's bank, the last Florida institution chartered before the financial crisis, shed its de novo status in February.
The new hurdle for LaRoe involves finding a like-minded bank. A small number of banks are mission driven and none are geographically close to First Green, he said.
"That's the lead discussion point we have" with a prospect, LaRoe said. "Florida isn't a real values-aligned state. Bankers are generally way on the conservative end of the spectrum so it would be a rarity to find a bank to buy where the CEO and chairman were all about the environment or social equality."
Finding banks with similar cultures, values or missions is difficult under normal circumstances, and would be even more daunting for an institution like First Green, industry experts said. As a result, focusing on whether two banks can meld after a deal closes should be addressed extensively.
Part of the "get-to-know-you process" should include discussing core principles and how each side prefers to do business, said Jonathan Hightower, a lawyer at Bryan Cave. Bankers should be clear about what they consider critical to every decision, he said.
"Culture has everything to do with a great acquisition," said Tom Rudkin, a principal at FIG Partners. "You can point to deals where the cultures didn't match up at all and the buyer struggled to get the seller aligned with what they do after the acquisition is completed."
While culture and mission are different components, both must be considered when thinking about a deal, said Jay Langan, a partner in Deloitte's M&A transaction service practice. A bank's mission, which Langan considers to be the institution's purpose, can include everything from focusing on a specific industry, such as energy or technology, to being socially conscious. It is important to understand how important that mission is to a certain bank's identity.
"You have to have a lot more dialogue upfront to understand how dogmatic that mission is," Langan said. "The melding and the development of that [mission] needs to happen before you get serious discussing the financials."
Sometimes the mission is more important than a merger.
New Resource has considered acquisitions but has largely ruled that option out, said Vince Siciliano, the $293 million-asset company's president and chief executive. The environmentally conscious bank is "100% focused on mission," so it lends only to businesses and nonprofits share that sensibility, such as clean energy, he said. It would involve too much risk trying to convert another institution to its culture, leaving management to focus on growing on its own.
"Organic growth will be more culturally solid and effective in executing our business plan, but just slower," Siciliano said. "Maybe it's like the tortoise and the hare. And if I remember correctly, the tortoise won that race."
Avoiding acquisitions is sometimes the best strategy, and banks need to consider how a number of other factors, including geography, will influence how a merger would play out, Hightower said. "It is perfectly reasonable to conclude that the answer is no, we aren't going to grow by acquisitions," he said.
Still, there are instances where values-driven banks have been successful acquirers.
Beneficial State, which recently acquired Pan American Bank in Los Angeles, didn't originally plan to pursue deals, said Kat Taylor, the $650 million-asset bank's co-founder and co-CEO. But when the troubled ShoreBank in Oregon and Washington needed a buyer in 2010, Taylor knew that she couldn't pass up the opportunity.
The ShoreBank deal taught Taylor the importance of purposefully fostering the right type of culture and concentrating on making a merger more of a partnership. "Culture, like mushrooms, grows whether you intend it to or not," she said.
For Pan American, which was feeling the pressure of mounting regulatory and technology costs, it made sense to join Beneficial State since both were certified community development financial institutions, or CDFIs, that served low- and moderate-income communities, said Robert Hughes, Pan American's former CEO. He now oversees consumer lending at Beneficial State.
"I don't see non-mission-driven banks buying other CDFIs," Hughes said. "I think you're either committed to this kind of work or not."
Beneficial State would like to do more deals to reach $1 billion of assets, where it would be in a better position to make a positive difference in the banking industry, but Taylor thinks that target may need to increase in the future.
One way for values-driven banks to grow could be partnering with each other and like-minded banks, which could include loan participations or sharing back-office technology, industry experts said.
"There are some activities [where] we need to be efficient … like core processing, technology and training," Taylor said. "Those are things that we can do together as a cohort without giving up the responsiveness we get by being smaller and in our communities."
LaRoe, who admitted that he has felt pressure to sell the bank because some investors are ready to exit, still would like to be a buyer. For his part, LaRoe is upfront with prospects about his passion for conservation, and conversations often start with a discussion about global warming. A dismissive response is an automatic deal breaker.
But those efforts also allow LaRoe to share his worldview, and a deal could allow the bank to have a bigger impact.
"The expansion strategy is exciting from the perspective that we will be spreading the gospel over a wider geographic area," he said.