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While the recent economic tornado destroyed businesses and institutions all over the country, it’s no secret community banks were among the hardest hit. Many small banks have turned toward strategic mergers as a way of enhancing shareholder value and creating a more saleable franchise.

Strategic mergers often include two institutions of different size and strengths combining to improve conditions for both parties. It’s important to understand that the terms in a strategic merger may not be equal, but the value of the bank should grow as the merged institution improves their market position, increases pro forma earnings per share (EPS) and creates a stronger management team.

The best prospects for a strategic merger include two healthy banks in the same market, with similar goals, both struggling to grow in the current economy. By combining their efforts, they can better position their franchise to increase value for a future sale, create a more diversified institution and drive up valuations.

Complications often arise as shareholders negotiate the exchange ratio of shares, which is based on a variety of factors, including the EPS, tangible book value (TBV) per share, and franchise and asset quality. Additionally, the merging banks must decide which one becomes the surviving legal entity, which bank keeps their brand, how management will be restructured and the number of board seats that will be retained.

To read more about Strategic Mergers visit the BankDirector.com.