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Since 1980, the structure of the U.S. banking industry has changed considerably, with more than 10,000 mergers involving more than $7 trillion in acquired assets having taken place. There were 19,069 banks and thrifts operating in the United States in 1980 and only 7,011 in 2010, a decline of more than 60 percent.1
Typically, bank merger and acquisition (M&A) activities have involved healthy and well-performing banks acquiring smaller and financially sound banks so that the acquiring bank can grow through scale and improved efficiency. M&A activities have slowed down during the recent financial crisis. However, the number of banks in the United States continues to decline as troubled institutions either failed or were being acquired by well-performing banks. Nonetheless, as the banking industry recovers from the crisis, M&A activities will likely pick up again.
Historically, there have not been many mergers or acquisitions among minority-owned financial institutions. While most transactions are primarily for expansionary purposes with a bank’s existing footprint, these transactions can also open new markets and help diversify the customer base if planned well. In 2007, Liberty Bank & Trust Co., one of the nation's largest African-American-owned banks, acquired Douglass National. When it opened in 1947, Douglass National was the first African-American-owned bank in the Kansas City area, according to the bank's website. The institution was named after Frederick Douglass, the famous 19th century abolitionist. According to Woody Briggs, an analyst at investment banking firm Chaffe & Associates Inc. of New Orleans, "There has been a movement of some of the larger and more successful minority banks to absorb... other minority-owned banks."2
Liberty has purchased three other failed institutions since the early 1990s, according to its CEO, Alden McDonald. Those banks include Corpus Christi Federal Credit Union and Carrollton Homestead, both of New Orleans, as well as Life Federal Savings Bank of Baton Rouge. Liberty has 20 branches in four states, including locations in Mississippi and Texas. The Douglass National deal raised Liberty's asset base to $373 million. With assets totaling approximately $560 million as of September 30, 2013, Liberty continues to grow its asset base organically and through acquisitions. It announced on October 28, 2013, the signing of an agreement to acquire the $60 million, Tuskegee, Alabama-based First Tuskegee Bank.
Although banks are usually acquired by other financial institutions, they may be acquired by individuals or groups interested in controlling a bank without building one from the ground up. In 2006, Robert L. Johnson, the founder and former chief executive of Black Entertainment Television, acquired a Florida savings and loan and moved it to Washington, D.C.
News reports indicate that the RL Johnson acquisition may be a springboard for a large consumer financial services company aimed at African American customers. In one article, reporters Barbara Hagenbaugh and Sue Kirchhoff explained that "The bank was renamed Urban Trust and is part of an effort by Johnson to build what he hopes will be the country's largest minority-owned financial services company, one positioned to attract major Wall Street investors as it seeks to foster and profit from rising black wealth. The company is meant to compete with the nation's most elite financial firms, but, its new chief executive said, it will also spend "a lot of afternoons in churches" advocating home ownership.3
The key drivers for mergers and acquisitions are geographical diversification, increased economies of scale, leveraged investment in technology, skill and expertise, revenue and/or market share, and pressure for performance. Mergers and acquisitions expedite a bank's expansion and can be an alternative to establishing new branches. As banks become larger, there is more pressure for smaller banks to improve economies and efficiencies in order to compete with the larger banks. Banking mergers and acquisitions are an attractive method of increasing economies of scale through the reduction of fixed unit costs.
Advancements in technology, including local area networks (LANs) and the Internet, have made it easier for companies to expand their operations. Improvements in technology and communications can facilitate cost reductions and allow a company to do business in places where it was not possible years ago. Also, the Internet may pressure banks to reduce cost structures, which in turn might stimulate mergers and acquisitions.
While a merger may produce many positive results it may also lead to an unfavorable outcome if the transaction was not properly planned and executed. Acquiring institutions need to identify many business considerations and risks. Anticipated cost savings may fail to materialize for several reasons, such as cultural and management incompatibility between the acquirer and the target, unforeseen credit issues at the target, poor employee morale, and unanticipated adjustments to the bank's mission, leading to customer departures. In addition, challenges in integrating different operating systems used by the acquirer and the acquiree also elevate operational risks. These risks can be mitigated by performing comprehensive due diligence, forming merger integration teams early in the process, establishing and maintaining strong management information systems (MIS), and integrating the best practices and infrastructure from both organizations.
Regulatory matters also need to be considered, since regulatory hurdles may appear before a merger is consummated. The Federal Reserve also encourages the "pre-filing" process to help address questions, as necessary. (See SR 12-12) . In addition to the applications required by the acquiring institution's primary regulator, applications may be required by the state banking department and the Federal Reserve. The Justice Department, Federal Trade Commission, and Securities and Exchange Commission may also be involved in the decision process.
The regulatory agencies want to ensure that expanding banking organizations have the financial and managerial strength necessary to succeed. As a general rule, a bank holding company acquiring another bank or bank holding company needs to be well-capitalized and well-managed at the time of and immediately after the proposed transaction.