The Risk Management Association (“RMA”) has published an M&A Playbook to assist member institutions in navigating the complexities of an M&A transaction. The Playbook was conceived by RMA’s Mid-Tier Bank Council and was drafted under the auspices of the Operational Risk Council. The RMA Bank M&A Playbook provides checklists, frameworks, data, and insights for financial institutions to reference as they navigate the M&A process, from initial consideration to closing.
M&A activity among banks has remained relatively consistent over the past five years (2015-2019), with an average of 242 transactions per year, which is the number of transactions reported in 2016. The persistent low net interest margin, coupled with increasing compliance costs, has been a primary driver of bank M&A activity. Other drivers of recent M&A activity include the cost of funding; a goal to increase market share; the need to increase size or scale to implement new technology, reduce the acquiring bank’s efficiency ratio, and to create synergies by augmenting the acquiring bank’s talent and/or by filling gaps in product offerings.
Every M&A transaction should clearly satisfy one overarching goal, namely, the creation of shareholder value. Banks should be mindful of the state of the economy prior to engaging in an M&A transaction. History demonstrates that banks that acquire other banks are generally successful in meeting long-term shareholder objectives if the merger occurs when GDP for the national and relevant local economies is growing by at least 2%. When the economy is growing 3% or more, the margin for error in an M&A transaction is relatively low.
- Since 1972 there have been over 21,000 bank mergers in the U.S.
- Of that total, 3,700 were “assisted” mergers, meaning the transaction occurred with the FDIC acting as broker of a failed bank
- Of the remaining more than 18,000 bank mergers, the vast majority have occurred during times of a healthy economy
When the economy is in decline or in a recession, bank profitability historically declines; for a quarter in 2008, after accounting for an increase in provision, bank profitability fell slightly negative. Acquisitions at this point in the cycle can be successful if deals are structured with deep discounts and a clear understanding of contingent liabilities.
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The Playbook is divided into four sections, an Introduction, which provides historical data from 2015—2019, as well as general M&A considerations, followed by Parts I-III described below:
Part I, “Applying Judgment to Bank Merger Checklists,” covers questions executives and directors should ask and answer before beginning merger discussions. For example: “Why do we believe the merger will not put at risk the acquiree’s most profitable current customer/client relationships?”
Part II, “Merger Checklists,” includes checklists regarding objectives and concerns covering due diligence, credit quality, legal, and regulatory issues.
Part III, “Synergy Risk and Disruption Risk During Mergers: Bank Merger Data 2014-2019,” puts into context data and metrics from recent M&A transactions, and what they mean for your institution’s experience.
RMA institutional members interested in purchasing the M&A Playbook should contact their Regional Manager.