Realities Beyond the Balance Sheet Facing Bank Buyers

Financial leaders face new and unique challenges as the navigate the remainder of this year and well into 2021.

The early reads on credit quality, credit access, operational and execution risk, regulatory oversight impacts and dimming growth prospects paint a bleak picture. Underlying this environment is an ongoing consideration for consolidation forcing institutions to assess their long-term viability. A closer examination of tangible book values clearly demonstrates who could be the buyers and potential sellers.

So, what is so different for M&A now? I have always believed that no two deals are the same -and that remains true. In the past, we may have looked solely at regulatory good standing, loan concentration, deposit pricing and distribution like geography and branches. While these remain fundamentally most important at the core, we now fully expect to see a heightened focus in due diligence around key layers of bank leadership, corporate culture and values, ability to deliver digital offerings to key customer segments, financial literacy programs and community investment.

A recent study by Deloitte noted that more than ever, bank M&A strategies need the right tools, teams and processes – from diligence through integrations – to pull off successful mergers. Additionally, buyers need to consider the compatibility and integration of any digital tools and how they will meet customer expectations. Can your bank deliver what these customers expect?

Most institutions looking to acquire or be acquired need to address several non-financial topics when considering how to proceed. Five in particular are consistently under-communicated by acquirers and will be even more impactful moving forward. These items speak to the fit of the merger partners – the intangible elements that cause the difference between a high customer retention rate with a platform for organic growth or a tepid retention rate with little sign of future organic growth.

1. Strategic Leadership
How an institution’s leaders navigated the recent Covid-19 pandemic says a lot about what investors, employees, customers and communities can expect if it merges with another bank. For example, the Small Business Administration’s Paycheck Protection Program may have given some banks lessons and plans that may make them potential partners worth exploring. No one knows what lies ahead, but strategic leaders must be able to think, clarify and execute during these new M&A conditions.

2. Bank Culture and Values
Most banks have a mission, vision and values statements. Until the current environment, how leaders must lead to make employees feel included and valued had not been challenged. But in almost every M&A engagement, there are significant segments of impacted employees and customers that experience uncertainty and fear. Demonstrated values can go a long way to secure trust and help the execution of these transactions succeed.

3. Digitization Expectations for Employees and Customers
Many institutions were not prepared for what occurred earlier this spring. Disaster recovery and business resumption plans were a solid start, but many were insufficient for this type of event, requiring operations and services to move off-site in a matter of days.

But aside from the initial challenges of the PPP, most banks appear to have done an outstanding job of helping employees work from home without too much customer disruption. This operating model will be the new way forward in banking. When banks merge, it is important to understand how each institution’s plan worked, and how much or little displacement that model could be for employees and customers going forward.

4. Financial Literacy and Inclusion
The reality of how our country has operated over decades has come into focus during the pandemic. One issue that many banks have identified is access to capital and providing banking services in a service-blind manner going forward. Financial literacy and inclusion must be a tenet in creating a more-effective banking system. Aligning how these programs can work, collaboration and inclusiveness can create a platform for capital distribution that works with any institutional strategy and grows exponentially after a merger.

5. Community Investment
Many institutions have invested significantly in community programs over the years. In a merger, these groups need to understand what the plan for that support will be going forward. The pandemic has made it even more important to discuss and support these investments in communities, given the struggle of many organizations these days. While these five items are not exhaustive, we know that they are among the top issues of executives, employees and customers at prospective selling institutions.