Article

Optimizing merger and acquisition strategies through asset liability management (ALM)

Sept. 19, 2023 · Authored by Ivan Cilik, Sean Statz

Does your organization know how to merge in another bank’s balance sheet while keeping your financial performance ratios in good place? Effectively using asset liability management (ALM) to assess liquidity risk can provide peace of mind when assessing if a target is attractive, optimize your liquidity performance, quantify impacts of funding in today’s high interest rate environment and identify asset and liability mismatches. Even if your organization is not merging anytime soon, focusing on modeling can create a competitive advantage by mitigating risks, identifying opportunities and maximizing value.

The current merger and acquisition (M&A) environment

Since the COVID-19 pandemic, the banking industry has experienced several ups and downs, including swings in loan and deposit growth, and interest rates. In the United States, M&A activity has also varied over the past couple of years, increasing dramatically in 2019 before plummeting in 2020, only to increase dramatically again in 2021. However, now that the economic market is volatile, many management teams are refraining from M&A activity until they see interest rates stabilize. Aug. 2023 saw the highest rate of M&A activity in over a year, showing signs that the market may stabilize sometime soon. Despite this, many industry professionals are expecting 2023 to be one of the slowest M&A years within the banking industry on record.

The midwestern United States continues to be a hotbed for M&A activity and is currently the most targeted region due to the large concentration of community banks. According to a 2023 Bank Director M&A survey, 85% of respondents said their bank either “plans to be active acquirers or were at least open to acquisitions. However, only 11% were very likely to acquire a bank this year, and of the 85% that were actively looking for or open to acquisitions, 34% said there were not enough suitable acquisition targets.

Our banking industry specialists have found that deposit base is the number one top target attribute for most M&A activity within the industry. Some other key focus areas are loan growth potential, branch locations, complementary balance sheets, complementary culture, efficiency gains and liquidity.