Succession Issue Looming? Consider a Merger of Equals

Register now

A dearth of younger talent could spur an increase in mergers of equals.

Since the financial crisis, banks, especially smaller institutions, have turned to acquisitions as a way to bulk up and absorb compliance costs. Still, cultural issues, such as management and board representation, can often get in the way of a deal, particularly when the banks are similarly sized.

While the banking industry is unlikely to see a deluge of true mergers of equals, more could take place since overall deal activity is heating up. At the same time, industry experts believe management teams should be open to pursuing more in coming months, particularly in instances where succession vacuums exist.

"These deals are usually best done when you have a situation where one side has a CEO or a management team retiring soon," said Paula Johannsen, managing director at Monroe Financial Partners.

"There are a lot of bankers that saw the banking industry as a great career path, but the next generation doesn't see it the same way," Johannsen added. "Some people may jump off the career track too quickly. Succession over time has probably been the No. 1 reason banks get sold."

Several recent deals have resolved succession issues.

Cardinal Bankshares in Floyd, Va., which has gone more than a year without a permanent chief executive, is merging with Grayson Bankshares in Independence, Va., in a deal where Allan Funk, Grayson's chief executive, will take over the top post at a rebranded bank.

Field & Main Bank in Henderson, Ky., was created last year through a merger of equals between Ohio Valley Financial Group and BankTrust Financial Group. (BankTrust's CEO was looking to retire, which paved the way for Scott Davis, Ohio Valley's leader, to run the company.)

Though it wasn't billed as a merger of equals, Hampton Roads Bankshares recently agreed to buy Xenith Bankshares. In that deal, T. Gaylon Layfield, Xenith's CEO, is to run the combined company. Hampton Roads had been looking for a permanent CEO since September.

Liquidity and control are two of the biggest hurdles for small-bank mergers, since sellers usually have to cede authority over those areas, Johannsen said. Mergers of equals, if structured properly, can give both banks more control and may even protect more of the current management, even if there is no obvious successor, she said. The absence of a successor at one bank makes it easier to reach an agreement.

Banks, especially smaller institutions, have fallen behind in their succession planning. Many CEOs had more pressing concerns during the crisis, and the elimination of formal training programs as a way of trimming expenses has shrunk the pool of qualified candidates.

Succession was a factor when the $332 million-asset Grayson National and the $259 million-asset Cardinal — southwestern Virginia banks that have known each other for decades — agreed to merge. Blake Edwards, Grayson's chief financial officer, had even helped Cardinal prepare some call reports when Cardinal lacked a CFO. (Edwards will remain CFO when the deal is completed.)

Both banks, which survived credit issues tied to the crisis, realized they both needed scale. Banks with at least $500 million of assets generally run more efficiently and have higher earnings multiples than smaller institutions, Funk said.

Cardinal, the parent company of Bank of Floyd, had been searching for a CEO after Michael Larrowe was ousted in November 2014, which made a merger easier to work out. The merger was announced in November; discussions began in July.

Grayson pitched the idea of a merger as an alternative to Cardinal hiring a permanent replacement for Larrowe, Funk said. "It was an opportune time, driven by issues that make a $600 million-asset bank more attractive," he added.

Mergers of equals typically work best when institutions are in complementary markets with little overlap, particularly when both banks are generating roughly the same amount of income, said Rod Taylor, president of the executive recruiting firm Taylor & Co.

Merging banks' CEOs are often concerned about their career prospects, Taylor said. "If one of the CEOs is ready to step down and retire — and the other is ready to step up and do a bigger, better job — then that can be a driving motivation for who you choose as a dance partner."

Grayson and Cardinal have little branch overlap and complementary products, allowing the combined company to cover more territory, executives said. For instance, Cardinal has a more robust online offering for commercial clients, while Grayson can provide debit cards to customers instantly as they open new accounts.

"We have a unique opportunity to offer some of the best-in-breed products for our customers … that neither of us could do on our own," said Lynn Murray, Cardinal's chief administrative officer.

"That really positions us very well," added Murray, who will become chief retail banking officer at the company.

Completing a merger of equals might appeal to some executive teams, industry observers said. Banks often prefer to identify themselves as acquirers rather than sellers, and a merger of equals can help management overcome this bias.

"If you're a $250 million or $300 million-asset bank being bought by a $2 billion-asset bank, then you don't control anything," Edwards said. "You're basically going away. These opportunities for two banks of similar sizes to combine gives each of them at least some ability to control their own destiny."

Besides potentially addressing management vacancies, mergers of equals can also help smaller banks solve problems recruiting talent for other posts.

Talent was a "tremendous factor and not just at the highest levels" when Ohio Valley Financial and BankTrust decided to merge and create a $404 million-asset company, Davis said. The merger also addressed gaps in areas such as retail banking, lending and compliance.

"Talent is going to be a major contribution for the need to come together," Davis added. "MOEs are more challenging, but they have their merits. It gives you the strength of both organizations. It is worth investing the time and effort to do that so both organizations can survive."

For reprint and licensing requests for this article, click here.
M&A Community banking