From blending differing values to choosing a new chairman, there are many challenges that can arise after a merger or acquisition. We spoke with legal and financial experts about what questions community bank leaders should ask themselves pre-merger, what issues they may face and how they can build an even stronger financial institution.

By Bridget McCrea

Combining two banks into one is a complex undertaking. Between the due diligence, financial negotiations, technology integrations and the unification of two established operations—be it via acquisition or merger—the process can be risky and challenging. There may be substantial rewards at the other end, but that doesn’t necessarily make the journey any easier.

As both sides of the table work out the details, post-merger board succession planning should be a key topic of discussion. It’s an aspect of the deal that shouldn’t be left until the last minute, although it often is. “What’s going to happen to your board once your banks merge can’t be an afterthought,” says Anton J. Moch, a bank M&A and governance attorney at Winthrop & Weinstine, P.A., in Minneapolis.

“These conversations should take place at the very beginning of any transaction, with a focus on how to put the boards together, who will stay or leave and who will be the new chairman of the board,” he continues. “You can’t wait until you’re signing a purchase agreement—or worse, until you’re closing on a deal—to figure out how you’re going to work with two disparate boards.”

This is important, because banks with strong boards are generally well positioned in their marketplaces, understand their customer bases and make good decisions. Those with weak boards tend to struggle with decision-making due to disagreements either among board members or with executive officers.

Greyson Tuck, Gerrish Smith Tuck Consultants and Attorneys

“Community banks are heavily influenced by their boards of directors,” says Greyson Tuck, president of Gerrish Smith Tuck Consultants and Attorneys in Memphis, Tenn. “The board makes decisions, maintains control and produces business for the bank. These are all important responsibilities for a bank as it goes through the merger or acquisition process.”

Preserving the value of the transaction

When one community bank acquires or merges with another bank, there are many steps to take and considerations to discuss. Some of the most important questions to ask are: Who are our key players? What are their relationships to the bank? How can we best preserve the value of those relationships?

“Ultimately, that’s where the value lies in the acquisition process,” says Tuck. “It’s about the extent to which you can preserve the relationships. This, in turn, preserves the value of the transaction.”

Post-merger board succession doesn’t always mean picking a handful of current directors and creating a single combined board either. For example, Tuck recently worked on a deal where the holding companies for two different rural community banks were interested in merging the two entities into one. The talks took place between the two holding companies and initially focused on the future direction of the combined bank, including the succession plans for the current officers and directors. Discussions centered around culture and fit as the banks worked to keep as many active board members onboard as possible.

Then, the banks decided to set up two boards: one focused on technology, operations and day-to-day contact with the community, and the other centered on business planning and strategy. While there was some overlap across the two boards, the bank worked to identify individuals who would be best suited to each specific group. Tuck says this “brought a new focus for those two organizations as they put the boards together.

“Ultimately, it ended up working out pretty well for them thanks to those very early discussions that took place before deal pricing and future plans were even discussed,” he says, advising a similar, proactive approach to board succession planning for any community bank that’s merging with another institution.

“Right from the start, there was a clear focus on the expertise and skills of the existing directors at each organization. Then, a lot of thought went into which individuals would be the best fit for each board.”

What to do when family is involved

On the surface, an M&A deal involving a family-owned community bank looks just like any other deal. Those similarities usually end when the layers are peeled back on the family-owned entity, whose corporate culture isn’t always reflected in the books, so to speak. For this and other reasons, post-merger board succession planning for this type of bank requires a special touch. Success will depend on whether the new guard can respect the synergies between the banks’ cultures, the founding family (or families) and the communities that they serve.

Another complication is the fact that family members likely serve on the bank’s board or as the majority board. “With most family-owned banks, 60% to 70% of the board members are family members and 20% to 30% are outside directors,” Tuck explains.

If those family members don’t want to give up control to a board that’s diluted by non-family members, the challenges may mount. One way to resolve the issue is by creating a holding company board that has a different composition than that of the bank board.

For example, at the holding company level there may be six directors, four of whom are family members and two of whom are outside directors. Then, at the bank level, there will be 10 directors, six of whom are family members and four of whom are outside directors. Tuck says this is a very common post-merger board succession scenario for family-owned banks.

“That gives a family comfort, because ultimately the bank board members are elected and come into their position as directors by the consent of the holding company,” Tuck points out. “Particularly for a family-owned bank, this strikes the balance of giving the family the control they want while allowing an appropriate number of outside directors to be involved.”

Working through differing priorities

Once a community bank has reached the point where it’s decided that a merger with another institution is what’s best for the organization, it should turn its attention to the post-merger board plans. “If you fail to do this, it’s basically like dropping the ball on all of the work that goes into the merger planning and strategizing process,” Moch cautions. “Your board will set the entire direction for the merged organization.”

[A chairman] can help guide and direct the discussions to ensure that, even if there is disagreement, once a direction is picked, everyone gets on board with it. A strong chairman can make a big difference in driving that forward momentum for the board itself.
—Anton J. Moch, Winthrop & Weinstine, P.A.

With the stage set for post-merger succession planning, banks may have to work through differing priorities among new and existing board members. To effectively address these and other conflicts, Moch tells banks to lean on the organization’s mission, goals and position in the community that it serves. They should ask questions like:

  • What do we want this bank to be?
  • How can we accomplish this?
  • What are our strengths and weaknesses?
  • How can our board help us leverage these strengths and overcome the challenges?

Anton J. Moch, Winthrop & Weinstine, P.A.

“Have a clear direction even if there’s competing interest. That way, you have something to go back to,” Moch says. If the board itself can’t reach a consensus, he advises bringing in an outside mediator to work through the issues and help set baseline business strategies. Invite board members to voice their opinions throughout the process, he adds, but ultimately also know that a majority of the board needs to approve decisions. Having a strong chairman in place can help banks achieve that consensus.

“He or she can help guide and direct the discussions to ensure that, even if there is disagreement, once a direction is picked, everyone gets on board with it,” says Moch. “A strong chairman can make a big difference in driving that forward momentum for the board itself.”

Honoring experience and planning for the future

Depending on how long a community bank has been in business, there may be board members who have been in place for decades. They each bring their own strengths and experience to the board, and their longtime knowledge of the banking industry makes them valuable assets for the organization.

As the banking environment, technology and customer preferences all continue to change, boards can also benefit from some fresh faces who may bring different perspectives, experience and ideas to the table.

A merger is a prime time to bring new and established members into a combined board that honors experience and helps the new entity plan for future success. One way to do this is by adding people with diverse experience and career paths to the new board, says Joshua M. Juergensen, principal, financial institutions at CliftonLarsonAllen LLP in Minneapolis. Start identifying these potential board member candidates—internal and external—as early as possible in the M&A process, he advises.

Next, consider sending these individuals to ICBA LEAD FWD Summits, ICBA LIVE and other industry leadership events for further education and training and to take advantage of networking opportunities. “There’s a lot of value in sending up-and-coming generations to various ICBA events,” says Juergensen, who feels that the industry as a whole needs to do a better job of helping these individuals set career paths and work toward leadership roles in community banking.

“We need to help them see the value of being in the banking industry, because without that, we’re not going to be able to retain the next generation of banking leaders who are currently in school,” Juergensen says. “They need to see the value of being in the industry and serving as leaders, directors, board members and chairmen of the board.”

Communication is key as you work through the M&A process and try to understand the buyer’s and seller’s position and then try to synthesize those to get the best possible result.
—Greyson Tuck, Gerrish Smith Tuck Consultants and Attorneys

Striking the right balance

To banks that are working through the post-merger board succession process or planning an M&A transaction soon, Tuck says the most successful deals usually involve some level of give and take. Sellers want to feel good about the process itself and their banks’ futures, and buyers want to know that they’ve acquired a valuable asset that will succeed over time. The board plays a crucial role in making that happen and should be a top-of-mind consideration as a bank works its way through the process.

“Communication is key as you work through the M&A process and try to understand the buyer’s and seller’s position and then try to synthesize those to get the best possible result,” Tuck says. “That doesn’t mean everyone will get everything that they want, but it does mean that you have to strike the right balance between the competing interests.”

5 tips for successful post-merger succession planning

  1. Start early by talking about the board planning at the very first M&A meeting. Consider both internal and external candidates, knowing that a good mix of the two will help the new bank honor legacy experience while embracing the future.
  2. Take early steps to identify individuals both in and out of the organization with an eye on diversification (for example, accountants, attorneys and other professionals from the community).
  3. If one or both banks are family-owned, be sure to factor in the related cultural and control issues that will surface as you put the new board together.
  4. In some scenarios two boards may be the best choice: one that handles the big-picture strategizing for the new bank and one that focuses on the day-to-day operations.
  5. Work to balance the long tenure of established board members while infusing the new board with individuals who may have more experience with technology, digital transformation and other modern requirements.

Tackling a broader succession planning issue

As Joshua M. Juergensen surveys the community banking industry, he sees a broader lack of succession planning that goes beyond just post-merger board planning.

“Succession planning as a whole is one of the biggest challenges that the community banking industry has today,” says Juergensen, who is principal, financial institutions at CliftonLarsonAllen LLP in Minneapolis. “In a lot of cases, there just isn’t a next generation that’s willing to take over the reins from the longtime, multigeneration, family-owned bank.”

This reality make institutions consider selling. This, in turn, creates the need for better post-merger board succession planning. “Candidly, I think a lot of the reasons that banks enter into these merger agreements is due to the lack of overall succession planning,” Juergensen adds.

An ICBA certification committee member, Juergensen says he’s recently seen a bigger focus being placed on educating the next generation of bank leaders. He sees this as a step in the right direction but says there’s still more work to be done.

“It’s about making sure that community banks are investing in the [associates] who may be future leaders of their organizations,” he says, “and taking the steps necessary to drive a successful succession planning process.”

Bridget McCrea is a writer in Florida.

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