Five Questions to Ask When Weighing Banking Software

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A contract for banking software should be the start of a working relationship.

When your bank purchases a new banking system, you should get more than a piece of software. From training to ongoing support, there’s a tremendous difference between a vendor who sells a system and a true partner who will work to enhance your banking operations.

But how do you know which is which? Here are some questions that could help you determine if a vendor is just a vendor — or if they could become a more-meaningful resource for your bank.

Do they have real banking expertise?
A software vendor that lacks real-world banking experience will never have the institutional knowledge necessary to serve as a true partner. The company may have been founded by a banker and their salespeople may have some cursory knowledge of how their solution works in a banking environment. However, that is not enough. You need a vendor that can offer expert insights based on experience. Ask salespeople or other contacts about their banking background and what they can do to help improve your bank.

Do they want to understand your issues?
A vendor won’t be able to help solve your problems if they aren’t interested in learning what they are. You should be able to get a sense of this early in the process, especially if you go through a software demonstration. Does the salesperson spend more time talking about features and system capabilities, or do they ask you about your needs first and foremost? A vendor looking to make a sale will focus on their program, while a true partner will take time to find out what your challenges are and what you really want to know. Look for a vendor who puts your needs above their own and you’ll likely find one who is truly invested in your success.

How quickly do they respond?
Vendors will show you how much they care by their turnaround speed when you have a question or need to troubleshoot a problem with your banking system. Any delay could prove costly, and a good partner acts on that immediate need and moves quickly because they care about your business. It can take some companies weeks to fully resolve customer issues, while others respond and actively work to solve the problem in only a few hours. Go with the software provider who is there for you when you need them most.

Do they go above and beyond?
Sometimes the only way to address an issue is to go beyond the immediate problem to the underlying causes. For example, you might think you have a process problem when onboarding treasury management customers, but it could actually be an issue that requires system automation to fully resolve.

A vendor that can identify those issues and give you insights on how to fix them, instead of bandaging the problem with a quick workaround, is one worth keeping around. This may mean your vendor proposes a solution that isn’t the easiest or the cheapest one, but this is a good thing. A vendor that is willing to tell you something you may not want to hear is one that truly wants what’s best for your organization.

Do they continue to be there for you?
Some software companies consider the engagement over once they’ve made the sale. Their helpline will be open if you have a problem, but your contact person there will have moved on to new targets as you struggle with implementation and the best way to utilize the software.

Find a vendor that plans to stick with your institution long after agreements have been signed. They should not only provide training to help facilitate a smooth transition to the new system, but they should remain accessible down the road. When a new software update becomes available or they release a new version of the system, they should proactively reach out and educate you on the new features — not try to sell you the latest development. Although you won’t know how those interactions will go until after you’ve made your purchase, it pays to evaluate the service you’re getting from your vendors at every stage of your engagement.

Finding a software vendor that you trust enough to consider a partner isn’t always easy. But by looking for some of the characteristics discussed above, you can identify the most trustworthy vendors. From there, you can start building a relationship that will pay dividends now and into the future.

Viewing the COVID-19 Crisis From a New Vantage Point

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Fintech companies have a unique vantage point from which to view the COVID-19 crisis.

Technology leaders are working long hours to help banks go remote, fill in customer service gaps and meet unprecedented loan demand. They’re providing millions of dollars in free services, and rapidly releasing new products. They’re talking to bankers all day, every day, and many of them are former bankers themselves.

Bank Director crowdsourced insights about banks’ pandemic-fueled tech initiatives from 30 fintech companies and distilled their viewpoints into five observations that can help banks sort through the digital demands they face today.

“Nice to Have” Technology Is Now “Must Have”
Online account opening, digital banking, financial wellness and customer service are garnering fresh attention as a result of the COVID-19 crisis.

Before the pandemic, these areas were thought of as “nice to have,” but they weren’t at the top of any bank’s tech expenditure list. COVID changed that.

Account opening and digital banking are essential when branch lobbies are closed, and customers are looking to their banks for advice in ways they never have before in times of widespread uncertainty.

These new demands have created a unique opportunity to push technology initiatives forward. Ben Morales, who had a 24-year tenure in banking before founding personal loan fintech QCash, observed that bank leaders shouldn’t “waste an emergency. Now is the time to push bank boards to invest.”

Bank boards are already talking about COVID as a potential inflection point for tech adoption, says Jon Rigsby, a former banker who co-founded and now is the CEO of Hawthorn River Lending. He notes that this moment is different from past crises. “In my 27-year banking career, I’ve never seen bankers change so fast. It was quite phenomenal.”

Customer Service, Financial Wellness Are Taking Center Stage
Consumers are increasingly seeking guidance from their banks, inundating call centers. As a result, communication and financial wellness tools are getting their moment in the sun.

Boston-based fintech Micronotes has witnessed exponential growth in demand for their product that helps banks initiate conversations with their customers digitally. Micronotes introduced a new program that’s purpose built for pandemic in mid-March. The Goodwill Program helps banks proactively communicate with their customers around issues like relief assistance and the Small Business Administration’s Paycheck Protection Program (PPP). Inbound interest in the firm from banks was nearly eight-times higher two weeks after the program launched, compared to the two weeks prior to launch, Micronotes reports.

Banks already equipped with digital communication tools are seeing an uptick in usage. Kasisto, a New York-based fintech, reported that several clients have seen a 20% to 30% increase in the use of KAI, a virtual assistant that can converse with customers and lessen the burden on call centers.

Financial wellness initiatives are also seeing liftoff. Happy Money, a personal loan fintech that uses financial and psychometric data to predict a borrower’s willingness to repay a loan, launched a free financial stress relief product for its bank partners’ customers. And SavvyMoney, a fintech that provides credit information to borrowers alongside pre-qualified loan offers, is seeing an influx of inquiries from banks that “understand the need to provide their customers with tools so they can better manage their money during uncertain financial times,” says CEO JB Orecchia.

Due Diligence Can Move Faster, When It Has To
Several fintechs have noted that banks are speeding up their vendor due diligence processes immensely — but not by relaxing standards.

Vendor onboarding programs can sometimes stretch to fill an entire year, according to Rishi Khosla, CEO of London-based digital bank OakNorth, but they don’t have to. OakNorth developed its own credit underwriting and monitoring solution, and recently spun out a technology company by the same name to provide the tools to banks outside of the U.K.

Khosla has a unique perspective given his dual roles as both a banker and technologist. He says some banks have created “unbelievable processes” that, when cut down, actually only amount to 10 to 20 hours of work. In this environment, he says, a commercial bank partner can get 20 hours of work done within days. They’re in “war mode,” so they can take a dramatically different approach, but with no less rigor.

“It’s not like they’re taking shortcuts. They’re going through all the right processes,” he says. “It’s just they’re doing it in a very efficient, streamlined manner without the bureaucracy.”

Approach Existing Partners First
Banks now wanting to adopt new technology may find themselves at the end of a long waitlist as fintechs are inundated with new demand. Fintech providers are prioritizing implementations for existing customers first — just as most banks prioritize existing borrowers for PPP loans.

To get the technology they need fast, some banks are getting creative in rejiggering the tech they do have to meet immediate needs.

Matt Johnner, a bank board member and the president of construction lending fintech BankLabs, got a call from a bank client a few days after the rollout of PPP loans. The bank wanted to customize the BankLabs construction loan automation tool to process PPP loans. Johnner says the bank “called because they know our software is customizable … and that we go live in 1 hour.”

Because of the exponential rise in digital demand, a bank’s success with technology during the pandemic has been based largely on what they had in place before the outbreak, according to many fintechs.

“Some banks are innovating through this and are thinking near and long term, especially those that have made good investments in digital banking and have a solid foundation to build out from,” explains Derik Sutton, VP of product and experience for small business solution Autobooks. “The most common response we get [from banks] is ‘We wish we had done this sooner.’”

Resist the Urge to Slash-and-Burn
There are typically three ways that banks respond in crisis, according to Joe Zeibert, who started his banking career as an intern at Bank of America Corp. in summer 2008. He recently joined pricing and analytics platform Nomis as managing director of global lending solutions after an 11-year career in banking, and believes history can be a useful indicator here.

“Similar to the financial crisis, we see some banks rushing to innovate who will be ahead of the curve when they get out of the downturn. Others are playing wait and see, and then others are slashing tech and innovation budgets to cut costs wherever they can,” says Zeibert. According to him, the more innovative banks came out of the last crisis better off than their peers that cut tech spending. “They came out of the downturn with a 5-year innovation lead over their competitors — a gap that is almost impossible to close,” he says. Banks now should resist the urge to slash and burn and, instead, focus on investing in technology that will help them emerge from the crisis stronger.

Most technology companies are reporting an influx of inbound interest from banks, and strong momentum on current projects. Fintechs appear to be rising to the occasion, and one sentiment they all seem to share is that it’s their time to give back; to help banks and, as a result, the nation, weather this crisis together.

*All of the companies mentioned in this article are offering new products, expedited implementations or free services to banks during COVID-19. To learn more about them, you can access their profiles in Bank Director’s FinXTech Connect platform.

The Uncertain Impact of COVID-19 on the Bank M&A Playbook

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As banks across the country grapple with market and economic dynamics heavily influenced by COVID-19, or the new coronavirus, separating data from speculation will become difficult.

The duration and ultimate impact of this market is unknowable at this point. The uncertain fallout of the pandemic is impacting previously announced deals and represents one of the biggest threats to future bank M&A activity. It will force dealmakers to rethink risk management in acquisitions and alter the way deals are structured and negotiated.

As we have seen in other times of financial crisis, buyers will become more disciplined and focused on shifting risk to sellers. Both buyers and sellers should preemptively address the impact of the coronavirus outbreak on their business and customers early in the socialization phase of a deal.

We’ve compiled a non-exhaustive list of potential issues that banks should consider when doing deals in this unprecedented time:

  • Due Diligence. Due diligence will be more challenging as buyers seek to understand, evaluate and quantify the ways in which the coronavirus will impact the business, earnings and financial condition of the target. Expect the due diligence process to become more robust and protracted than we have seen in recent years.
  • Acquisition Funding. Market disruption caused by the virus could compromise the availability and pricing of acquisition financing, including both equity and debt financing alternatives, complicating a buyers’ ability to obtain funding.
  • Price Protections. For deals involving publicly traded buyer stock, the seller will likely be more focused on price floors and could place more negotiating emphasis around caps, floors and collars for equity-based consideration. However, we expect those to be difficult to negotiate amid current volatility. Similarly, termination provisions based upon changes in value should also be carefully negotiated.

In a typical transaction, a “double trigger” termination provision may be used, which provides that both a material decline in buyer stock price on an absolute basis (typically between 15% and 20%) and a material decline relative to an appropriate index will give the seller a termination right. Sellers should consider if that protection is adequate, and buyers should push for the ability to increase the purchase price (or number of shares issued in a stock deal) in order to keep the deal together and avoid triggering termination provisions.

  • Representations and Warranties. As we have seen in other economic downturns, expect buyers to “tighten up” representations and warranties to ensure all material issues have been disclosed. Likewise, buyers will want to consider including additional representations related to the target business’ continuity processes and other areas that may be impacted by the current pandemic situation. Pre-closing due diligence by buyers will also be more extensive.
  • Escrows, Holdbacks and Indemnities. Buyers may require escrows or holdbacks of the merger consideration to indemnify them for unquantifiable/inchoate risk and for breaches of representations and warranties discovered after closing.  
  • Interim operating covenants. Interim operating covenants that require the seller to operate in the ordinary course of business to protect the value of their franchises are standard provisions in bank M&A agreements. In this environment we see many banks deferring interest and principal payments to borrowers and significantly cutting rates on deposits. Sellers will need some flexibility to make needed changes in order to adapt to rapidly changing market conditions; buyers will want to ensure such changes do not fundamentally change the balance sheet and earnings outlook for the seller. Parties to the agreement will need focus on the current realities and develop reasonable compromises on interim operating covenants.
  • Investment Portfolios and AOCI. The impact of the rate cuts has created significant unrealized gains in most bank’s investment portfolio. The impact of large gains and fluctuations in value in investment securities portfolios will also come into focus in deal structure consideration. Many deals have minimum equity delivery requirements; market volatility in the investment portfolio could result in significant swings in shareholders’ equity calculations and impact pricing.
  • MAC Clauses. Material Adverse Change (MAC) definitions should be carefully negotiated to capture or exclude impacts of the coronavirus as appropriate. Buyers may insist that MAC clauses capture COVID-19 and other pandemic risks in order to provide them an opportunity to terminate and walk away if the target’s business is disproportionally affected by this pandemic.
  • Fiduciary Duty Outs. Fiduciary duty out provisions should also be carefully negotiated. While there are many variations of fiduciary duty outs, expect to see more focus on these provisions, particularly around the ability of the target’s board to change its recommendation and terminate because of an “intervening event” rather than exclusively because of a superior proposal. Likewise, buyers will likely become more focused on break-up fees and expense reimbursements when these provisions are triggered.
  • Regulatory approvals. The regulatory approval process could also become more challenging and take longer than normal as banking regulators become more concerned about credit quality deterioration and pro forma capitalization of the merged banks in an unprecedented and deteriorating economic environment. Buyer should also consider including a robust termination right for regulatory approvals with “burdensome conditions” that would adversely affect the combined organization.

While bank M&A may be challenging in the current environment, we believe that ample strategic opportunities will ultimately arise, particularly for cash buyers that can demonstrate patience. Credit marks will be complex if the current uncertainty continues, but valuable franchises may be available at attractive prices in the near future.

2019 Mid-Year Bank M&A Outlook

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merger-8-5-19.pngWhat might the second half of 2019 bring for bank mergers and acquisitions (M&A)?

The favorable drivers in the first half of 2019 — the regulatory landscape, enhanced earnings as a result of tax reform, desire for scale and efficiency, and the search for digital capabilities — will likely continue to be the catalysts for bank M&A activity in the second half of 2019. While the market has not seen a spike in the bank M&A deal volume, overall deal values continue to rise because of a few large transactions, including mergers with price tags of a $28 billion and a $3.6 billion. The following trends and drivers are expected to continue to have an impact on banking M&A activity in the second half of 2019 and beyond.

Intensifying Battle for Secured Customer Deposit Bases
U.S. banks’ deposit costs rose far more quickly than loan yields in the first quarter of 2019; further increases in deposit costs may prevent net interest margins from expanding in 2019. As the competition for deposits intensifies, buyers are increasingly looking for banks with a secured deposit base, especially those with a significant percentage. Moreover, as deposit betas accelerate — even as the Federal Open Market Committee slows rate hikes — it becomes more difficult for banks to grow deposits.

With the largest banks attempting to grow their deposit market share via organic customer growth, the regional and super regional banks are trying to develop similar presences through acquisitions. Banks that can navigate this rate environment ably should emerge as better-positioned acquirers via their stock currency, or sellers through the attractiveness of their funding base.

Favorable Regulatory Environment
Dodd-Frank regulations have eased over the past 12 months, increasing the threshold for added oversight and scrutiny from $50 billion in assets to $250 billion. Easing bank regulations and tax reforms that create surplus capital could continue driving regional and super regional consolidation. Moreover, banks with $250 billion to $700 billion in assets may continue to benefit in the second half of 2019 from a more-favorable regulatory landscape.

MOE’s Potential Change on the Competitive Landscape
There were a couple of mergers of equals (MOE) in the first half of 2019 that were welcomed by investors — an indication that the industry could be likely to see a rise in the volume of larger transactions in 2019. Regional banks that miss the MOE wave in the near term may soon find themselves without a “partner” after the initial wave of acquisitions occurs.

As the banks pressure-test their MOE strategy, the key may be to find a partner with strategic overlap to drive the synergies and justify the purchase price premium yet also provide an opportunity for growth and geographic footprint. Furthermore, unlike smaller tuck-ins, MOE requires additional strategic diligence and capabilities. This includes the ability to successfully integrate and scale capabilities, the ability to cross-sell to newly acquired segments, the ability to consolidate branches in overlapping markets and integrating divergent management processes and culture.

The Hunt for Digital Capabilities
Evolving consumer wants and the table stake needed to provide an integrated digital ecosystem are compelling many bank executives to differentiate themselves via technology and digital channels growth. Investors typically place a premium on digital-forward banks, driving up multiples for banks with efficient ecosystems of digital capabilities. The hunt for digital capabilities may provide an opportunity to not only add scale, but also transform legacy banks into agile, digital-first banks of the future.

Bank boards and executives should remain cognizant of above trends as they progress through their strategic M&A planning. Their resulting decisions — to be buyer, seller or an observer on the sidelines — may shape bank M&A activity in the second half of 2019 and into 2020.

Moreover, while the banks continue to assess the potential impact of the current expected credit loss (CECL) standard, the general market consensus is CECL may require a capital charge. As such, M&A credit due diligence should be treated as an investment in reducing future losses, even though the loan quality is currently viewed as benign. Successfully driving value from acquisitions while mitigating risks requires a focused lens on M&A strategy with the right set of tools, teams and processes to perform due diligence, execute and integrate as needed.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

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Copyright © 2019 Deloitte Development LLC. All rights reserved.

Using Intelligent Automation to Bank Smarter, Not Harder

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technology-5-4-19.pngBy this point in 2019, most consumers and companies are somewhat familiar with the concept of artificial intelligence. Executives and consultants have discussed its application in financial services for years; lately, the conversations have been brisk and some organizations are doing more than just talking. Many tangible AI use cases have emerged at financial institutions of all sizes over the last 12 months, and intelligent technology is beginning to make an impact on banks’ productivity and bottom lines.

Still, AI remains a largely abstract concept for many institutions. Some of the biggest challenges these banks face in preparing and executing an AI strategy starts with having a too-narrow definition of these technologies.

Technically, AI is the ability of machines to use complex algorithms to learn to do tasks that are traditionally performed by humans. It is often misrepresented or misunderstood in broader explanations as a wider range of automation technologies — technologies that would be more appropriately characterized as robotics or voice recognition, for example.

Banks interested in using intelligent automation, which includes AI, robotic process automation, and other smart technologies, should target areas that could benefit the most through operational efficiencies or speed up their digital transformation.

Banks are more likely to achieve their automation goals if executives shift their mindsets toward thinking about ways they can apply smart technologies throughout the institution. Intelligent automation leverages multiple technologies to achieve efficiency. Some examples include:

  • Using imaging technology to extract data from electronic images. For example, banks can use optical character recognition, or OCR, technology to extract information from invoices or loan applications, shortening the completion time and minimizing errors.
  • Robotic process automation, or RPA, to handle high-volume, repeatable manual tasks. Many institutions, including community banks with $180 million in assets up to the largest institutions in the world have leveraged RPA to reduce merger costs, bundle loans for sale and close inactive credit and debit cards.
  • Machine learning or AI to simulate human cognition and expedite problem solving. These applications can be used in areas ranging from customer service interactions to sophisticated back-office processes. Some industry reports estimate that financial institutions can save $1 trillion within the next few years through AI optimization. Several large banks have debuted their own virtual assistants or chatbots; other financial institutions are following suit by making it easier and more convenient for customers to transact on the go.

What are next steps for banks interested in using AI? Banks first need to identify the right use cases for their organization, evaluating and prioritizing them by feasibility and business need. It’s more effective to start with small projects and learn from them. Conduct due diligence to fully assess each project’s complexity, and plan to build interactively. Start moving away from thinking about robots replacing employees, and start considering how banking smarter – not harder – can play out in phases.

How Subchapter S Issues Could Snag a Sale

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acquisitions-5-2-19.pngNearly 2,000 banks in the U.S. have elected Subchapter S tax treatment as a way of enhancing shareholder value since 1997, the first year they were permitted to make the election. Consequently, many banks have more than 20 years of operating history as an S corporation.

However, this history is presenting increasingly frequent challenges during acquisition due diligence. Acquirers of S corporations are placing greater emphasis on due diligence to ensure that the target made a valid initial Subchapter S election and continuously maintained eligibility since the election. Common issues arising during due diligence typically fall into two categories:

  • Failure to maintain stock transfer and shareholder records with sufficient specificity to demonstrate continuous eligibility as an S corporation.
  • Failure by certain trust shareholders to timely make required Qualified Subchapter S Trust (QSST) or Electing Small Business Trust (ESBT) elections.

A target’s inability to affirmatively demonstrate its initial or continuing eligibility as an S corporation creates a risk for the acquirer. The target’s S election could be disregarded after the deal closes, subjecting the acquirer to corporate-level tax liability with respect to the target for all prior periods that are within the statute of limitations. This risk assessment may impact the purchase price or the willingness of the buyer to proceed with the transaction. In addition, the target could become exposed to corporate tax liability, depending on the extent of the compliance issues revealed during due diligence, unless remediated.

Accordingly, it is important for S corporation banks to ensure that their elections are continuously maintained and that they retain appropriate documentation to demonstrate compliance. An S corporation bank should retain all records associated with the initial election, including all shareholder consents and IRS election forms. S corporation banks should also maintain detailed stock transfer records to enable the substantiation of continuous shareholder eligibility.

Prior to registering a stock transfer to a trust, S corporation banks should request and retain copies of all governing trust instruments, as well as any required IRS elections.

It is also advisable to have the bank’s legal counsel review these trust instruments to confirm eligibility status and any required elections. Banks that are relying on the family aggregation rules to stay below the 100 shareholder limitation should also keep records supporting the family aggregation analysis.

While S corporation banks have realized significant economic benefits through the elimination of double taxation of corporate earnings, maintaining strong recordkeeping practices is a critical element in protecting and maximizing franchise value, especially during an acquisition. Any S corporation bank that is contemplating selling in the foreseeable future should consider conducting a preemptive review of its Subchapter S compliance and take any steps necessary to remediate adverse findings or secure missing documentation prior to exploring a sale.

Credit Due Diligence Is Even More Important Now

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due-diligence-4-17-19.pngWith loan quality generally viewed as benign while M&A activity continues into 2019, is any emphasis on credit due diligence now misplaced? The answer is no.

With efficiency driving consolidation, bank boards and management should not be tempted to take any shortcuts to save time and money by substituting credit quality through recent loan reviews and implied findings of regulatory exams.

The overarching reason is the nature of the current business and credit cycle. The economy is strong right now, and among many banks net recoveries have replaced net charge-offs.

But it is not a matter of if but when credit stress rears its head.

And time truly is money when trying to stay ahead of the turn of the credit worm. That means now is the time to highlight a few buy- or sell-side justifications for a credible M&A credit due diligence.

Some challenges always require vigilance. These include:

  • Heightened correlated lending concentrations
  • Superficial underwriting and/or servicing
  • Acquired third-party exposures through participations or syndications
  • Insider lending (albeit indirect)
  • Getting upside down on commodity or collateral valuations
  • Covenant-light lending
  • Credit cultural incongruity

New Risks, New Assessments
The emergence of a portfolio-wide macro approach to credit risk during the past decade has ushered in a flurry of statistical disciplines, such as calculating probabilities of default, loss-given defaults, risk grade migrations, and probability modeling to project baseline and stress loss credit marks for investors and acquirers.

Credible due diligence now provides rich assessments of various pools and subsets of loans within a target’s portfolio. These quantitative measures provide a precise estimate of embedded credit losses, in parallel with the adoption of the current expected credit loss (CECL) standard, to project life of portfolio credit risk and end deficiencies in the current allowance guidance.

Good credit assessment is capped by qualitative components. There are several factors to consider in the current credit cycle.

  • Vintage of loan originations: Late-cycle loans to chase growth goals or to entice investors carry higher risk profiles.
  • Exotic lending: Some banks have added less conventional loan products to their offerings, which may require specialized talent.
  • Leveraged financial transactions: For some banks, commercial and industrial (C&I) syndications have replaced the real estate participation of a decade ago. They have recently grown in leverage and stress, and would be susceptible to an economic downturn.
  • Hyper commercial real estate valuation increases: Recent studies have shown significant increases in commercial property values, well over the pace of residential 1-4 family properties, along with the headwinds of higher interest rates and the advent of diminished real estate requisites accompanying the tech-driven virtual marketplace.
  • Dependence on current circumstance as proxies for future credit quality: We must accept that we are affected by trailing, rather than by leading, credit metric indicators.
  • Lending cultural protocols: Knowing the skill sets and risk appetites of prospective teammates is imperative. Some would argue that in today’s consolidation environment, cultural incongruity trumps loan quality as the biggest determinant of success.

What Should Lie Ahead
Credit due diligence should provide a key strategic forerunner to the financial and cultural integration between institutions that might have disparate lending philosophies.

It should include an in-depth quantitative dive combined with a skilled assessment of qualitative factors, both of which are critical in providing valuable insight to management and the board. Yet, to reduce costs some have difficulty swallowing any in-depth credit diligence, given the de minimis nature of recent losses and low levels of problem loans.

Many economic indicators point to tepid economic growth in 2019. At some point, the current credit cycle will turn. A lesson learned from the financial crisis has been to be proactive in risk management to stay ahead of the risk curve—and not be left to be reactive to negative effects.

During the crisis, many banks suffered greater losses due to their reluctance to initiate remediation in response to deteriorating credit. M&A credit due diligence must be treated as an anticipation of the future, not a validation of the past, and an investment in curtailing future losses.

Advice for Buyers & Sellers in 2019

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The need for stable, low-cost deposits is driving deals today, and the increasing use of technology is changing how banks should approach integrating an acquisition. In this video, Bill Zumvorde of Profit Resources shares what prospective buyers and sellers need to know about the operating environment. He also explains how bank leaders can better integrate an acquisition and how potential sellers can get the best price for their bank.

  • Today’s M&A Environment
  • Common Integration Mistakes
  • Maximizing Acquisition Success
  • Tips for Prospective Sellers

What You Should Know About M&A in 2019

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Deal values have been rising, and economic factors—including regulatory easing and increased deposit competition—could drive more deals for regional acquirers, explains Deloitte & Touche Partner Matt Hutton in this video. He also shares how nontraditional acquisitions could impact deal structures, and the importance of due diligence and stress testing at this stage in the credit cycle.

  • Today’s M&A Environment
  • Deal Structure Considerations
  • Expectations for 2019
  • Advice for Boards and Management Teams

Five Lessons You Can Learn from Tech-Savvy Banks

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technology-9-20-18.pngFew directors and executives responding to Bank Director’s 2018 Technology Survey believe their bank to be industry-leading when it comes to how they strategically approach technology—just five percent, compared to 70 percent who identify their bank as a fast follower, and 25 percent who say their bank is slow to implement or struggles to adopt new technology.

While most banks understand the need to enhance their technological capabilities and digital offerings, the leaders of more tech-savvy banks reveal they’re seeking outside help, as well as focusing greater internal resources and more board attention to the technological conundrum faced by the industry; that is, how to make their banks more efficient, and better serve customers so they don’t take their deposit dollars or loan business to another competitor—whether that’s the local credit union, one of the big banks or a digital challenger.

Based on the survey, we uncovered five lessons from these banks that you should consider adopting in your own institution. At the very least, you should be discussing these issues at your next board meeting.

1. Tech-savvy banks see a primarily digital future for their organizations.
While innovation leaders and laggards are equally as likely to cite the improvement of the digital user experience as a top goal over the next two years, respondents from tech-savvy banks are less likely to focus on the branch channel. Just 14 percent plan to upgrade their branch technology in the next two years, and 14 percent plan to add new technology in their branches, compared to roughly half of respondents from fast follower or technologically struggling banks.

Goals-chart.png

Tech-savvy banks are also more likely to indicate that they plan to close branches—29 percent, compared to 8 percent of their peers—and they’re slightly more likely add branches that are smaller—57 percent, compared to 45 percent.

With branch traffic down but customers still expecting great service from their financial provider—in a digital format—many banks will need to rethink branch strategies. “There is a newer branch model that, to me, more resembles an office environment that you would go to get advice, to sit down and meet with people, but it’s really not a place where transactions are going to be taking place,” says Frank Sorrentino, the chief executive of $5.3 billion asset ConnectOne Bancorp, based in Englewood Cliffs, New Jersey. The branch still has a place in the banking ecosystem, but “people want a high level of accessibility, and the highest form of accessibility is going to be through the digital channel.”

2. Industry-leading banks are more likely to seek newer technology startups to work with, rather than established providers.
Seventy-one percent of tech-savvy banks have a board and management team who are open to working with newer technology providers that were founded within the past five years, to help implement new products and services, or create efficiencies within the organization. In contrast, 31 percent of their peers haven’t considered working with a startup, and 10 percent aren’t open to the idea.

“We in the smaller end of the banking space find ourselves constrained in how much investment we can make in technology,” says Scott Blake, the chief information officer at $4.3 billion asset Bangor Savings Bank, in Bangor, Maine. “So, we have to find creative ways to leverage the investments that we are able to make, and one of the ways that we’re able to do that is in looking at some of these earlier-stage companies that are on the right track and trying to find strategic ways that we can connect with them.”

Working with newer providers could require extra due diligence, and banks leading the field when it comes to technological adoption indicate they’re willing to take a little more time to get to know the companies with which they plan to work. This means meeting with the vendor’s executive team (100 percent of respondents from tech-savvy organizations, versus 62 percent of their peers) and visiting the vendor’s headquarters to meet its staff and understand its culture (71 percent, compared to 51 percent of peers).

“I’m a pretty big believer in trying to have these relationships be partnerships whenever possible, and that doesn’t happen if we don’t have a company-to-company relationship, and a person-to-person relationship,” says Blake. By partnership, he means the bank actively works with the startup to produce a better product or service, which benefits Bangor Savings and its customers, as well as the bank’s technology partner and its clients.

3. Tech-savvy banks dedicate a high-level executive to technology and innovation.
Eighty-three percent of respondents from tech-savvy banks say a high-level executive focuses on innovation, compared to 53 percent of their peers. They’re also more likely to report that their bank has developed an innovation lab or team, and are more likely to participate in hackathons and startup accelerators.

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But Blake doesn’t believe that establishing an innovation unit that functions separately from the bank is culturally healthy for his organization, though it can be effective tool to attack select projects or problems. Instead, Bangor Savings has invested in additional training and education for staff who have the interest and the aptitude for innovation. “We want everyone, to some extent, to think about, ‘how can I do this task that I have to do better,’ and that will hopefully yield longer-term benefits for us,” he says.

4. The board discusses technology at every meeting.
Eighty-three percent of respondents from tech-savvy banks say directors discuss technology at every board meeting, compared to 57 percent of fast followers and one-quarter of respondents whose banks are slow or struggle to adopt technology. They’re also more likely to have a board-level technology committee that regularly presents to the board—50 percent, compared to 28 percent of their peers.

Larry Sterrs, the chairman of the board at $4.2 billion asset Camden National Corp. in Camden, Maine, says with technology driving so many changes, a committee was needed to address the issue to ensure significant items were reviewed and discussed. The committee focuses on items related to the bank’s budget around technology, including status updates on key projects, and stays on top of enhancing products, services and delivery channels, as well as back-office improvements and cybersecurity. It’s a lot to discuss, he says.

The board receives minutes and other information from the committee in advance of every board meeting, and technology is a regular line item on the agenda.

Technology committees have yet to be widely adopted by the industry: Bank Director’s 2018 Compensation Survey, published earlier this year, found 20 percent of boards have a technology committee. Bank boards also struggle to add technology expertise, with 44 percent citing the recruitment of tech-savvy directors as a top governance challenge.

5. Tech-savvy banks still recognize the need to enhance board expertise on the issue.
Individual directors of tech-savvy banks are no more likely to be early adopters of technology in their personal lives when compared to their peers, so education on the topic is still needed.

Not every director on the board can—or should—be a technology expert, but boards still need a baseline understanding of the issue. Camden National provides one or two technology-focused educational opportunities a year, in addition to written materials and videos from outside sources. If a specific technology will be addressed on the agenda, educational materials will be provided, for example. This impacts the quality of board discussion. “We always get a good dialogue and conversation going, [and] we always get a lot of really good questions,” says Sterrs.

Bank Director’s 2018 Technology Survey is sponsored by CDW. Click here to view the full results.