M&A Readiness: Making Sure Your Bank Can Do Acquisitions


acquisitions-5-10-17.pngWith many financial institutions benefiting from increased stock values and renewed optimism following the November election, merger activity for community banks is on the uptick. Successful acquirers must remain in a state of readiness to take advantage of opportunities as they present themselves.

Whether a prolonged courtship or a pitch book from an investment banker, deals hardly, if ever, show up when it is most convenient for a buyer to execute on them. As a result, buyers need to develop a plan as to what they want, where they want it and what they are willing to pay for it, long before the “it” becomes available. M&A readiness equates to the board of directors working with management to have a well-defined M&A process that includes the internal and external resources ready to jump in to conduct due diligence, structure a transaction and map out integration. Also, M&A readiness requires that buyers have their house in order, meaning that their technology is scalable, they have no compliance issues and the capital is on hand or readily available to support an acquisition.

Technology. In assessing the scalability of an institution’s technology for acquisitions, a buyer should review its existing technology contracts to see if it has the ability to mitigate or even eliminate termination fees for targets that utilize the same core provider. Without this feature, some deals cannot happen due to the costs of terminating the target’s data processing contracts. Cybersecurity is another key element of readiness. As an institution grows, its cybersecurity needs to advance in accordance with its size. Buyers need to understand targets’ cybersecurity procedures and providers in order to ensure that their own systems overlap and don’t create gaps of coverage, increasing risk. Additionally, buyers should understand existing cybersecurity insurance coverage and the impact of a transaction on such policies.

Compliance. Compliance readiness, or lack thereof, are the rocks against which even the best acquisition plans can crash and sink. Ensure that your Bank Secrecy Act/anti-money laundering programs are above reproach and operating effectively, and that your fair lending and Community Reinvestment Act policies, procedures and practices are effective. Running into compliance issues will cause missed opportunities as the regulators prohibit any expansion activities until any issues are resolved.

Conducting a thorough review of compliance programs of a target is critical to an efficient regulatory and integration process. A challenge to overcome is the regulators’ prohibition on buyers reviewing confidential supervisory information (CSI), including exam reports as part of due diligence. While the sharing of this information has always been prohibited, the regulatory agencies have become more diligent on enforcement of this prohibition. Although it is possible to request permission from the applicable regulatory agency to review CSI, the presumption is that the regulators will reject the request or it will not be answered until the request is stale. As such, buyers should enhance their discussions with target’s management to elicit the same type of information without causing the target to disclose CSI. A simple starting point is for the buyer to ask how many pages were in the last exam report.

While stress testing may officially apply to banks with $10 billion or more in assets, regulators are expecting smaller banks to prevent concentrations of risk from building up in their portfolios. The expectation is for banks to conduct annual stress tests, particularly among their commercial real estate (CRE) loans. Because of these expectations, buyers need to know the interagency guidance governing CRE concentrations and how they will be viewed on a combined basis. Reviewing different stress-test approaches can help banks better understand the alternatives that are available to meet their unique requirements.

Capital. An effective capital plan includes triggers to notify the institution’s board when additional capital will be needed and contemplates how it will obtain that capital. Ideally, the buyer’s capital plan works in tandem with its strategic plan as it relates to growth through acquisitions. Recently the public capital markets have become much more receptive to sales of community bank stock, but this has not always been the case. In evaluating an acquisition, the regulators will expect to see significant capital to absorb the target as well as continue to implement the buyer’s strategic plan.

The increase in financial institution stock prices has increased acquisition opportunities and M&A activity since the election. Opportunistic financial institutions have plans in place and solid understandings of their own technology needs and agreements, regulatory compliance issues and capital sources. Although it sounds simple, a developed acquisition strategy will aid buyers in taking advantage of opportunities and minimizing risk in the current environment.

How to Pick the Right Digital Small Business Lending Tool: Top 10 Must Have Characteristics


lending-4-24-17.pngHaving access to online lending applications has quickly transitioned from a customer convenience to a customer expectation. It’s only a matter of time before all institutions will be providing digital access to small business lending. That much is certain. What isn’t certain is how to find the right fintech partner. Your partner should understand your institution’s lending processes and digital strategy in that space, and provide you with a solution that meets your unique objectives.

Here are the top 10 characteristics you should demand from any digital business lending partner.

1. Friend Not a Foe Business Model
It’s obvious, I know, but find a partner who is not a competitor of yours. There are business lending fintech companies that once had designs on putting banks and credit union lending departments out of business. If the businesses you serve can also go to your partner’s website and apply directly with them for a loan, they’re not a partner. They are a competitor.

2. Timely End-to-End Functionality
Current business lending processes are onerous for both the client and the bank. Applications are submitted incompletely 60 percent of the time, and data is bounced from one party to another and back again. Technology does an amazing job of doing things right the first time every time. The value in your business lending tool resides in its ability to help facilitate everything from the application to closing the loan.

3. Endorsed by a Trusted Source
Most of the financial services industry’s trusted resources and trade associations provide their members with a list of solutions for which they have completed comprehensive due diligence and identified as an endorsed solution. Entities, like the American Bankers Association, Consumer Bankers Association and others, have the resources to conduct due diligence on the companies they recommend. Leverage their expertise.

4. Control…Control…Control
The institution must be able to retain control over every aspect of the process. Your clients should never even know the tech partner exists. The brand, the credit policy, pricing, scoring, decisions, and all aspects of the customer relationship must be fully owned and controlled by the institution.

5. Customer Experience
Find a tech partner that shares your philosophy of putting the borrower at the center of the process. Look for a tool that creates an engaging, simple, and even fun environment for the application portion of the process, and results in a speedier, more efficient and convenient end-to-end process.

6. Enhances Productivity
Find tech that frees up your sales staff to sell, and allows your back office to spend minutes—not hours—making a decision on a business loan. Sales teams should spend their time growing relationships and sourcing new deals as opposed to shepherding deals through the process or chasing documentation. With the right tool, back office can analyze deals quickly and spend more time on second look processes or inspecting larger deals.

7. Builds the Loan Portfolio
Find a tech solution so good that it will draw new opportunities into your shop—even those folks who would never think about walking into a branch. And make sure the application process can accommodate both the borrower who is online and independent, as well as the borrower who wants to sit next to a banker and complete the application together.

8. The Human Touch
The most important relationship is the one between banker and customer. Don’t lose the personal touch by using technology that cuts out the value the banker brings to the relationship. Instead, find a tool that engages the relationship managers and facilitates their trusted advisor status.

9. Positive Impact on Profitability
By finding a tool that enhances productivity across the board, you should be able to reduce cost-per-loan booked by as much as two-thirds. That means even the smallest business loans should be processed profitably.

10. Cloud-Based Model
The best way to keep pace with innovation in a cost-effective manner is to find a partner that uses the latest technology, development processes and a cloud-based model, which enhances storage capabilities. Your partner should update and enhance often, and not nickel and dime you for every enhancement or upgrade.

Stick to these guidelines and you’ll be sure to find the right tool for your unique institution.

Customer Experience Can Make or Break Your Transaction


mergers-4-11-17.pngStudies evaluating the accomplishment of mergers and acquisitions (M&A) consistently show how difficult it is to have a successful transaction. The statistics remain unchanged year-over-year in academic research: 70 to 90 percent of all deals fail to achieve the deal thesis or intended benefits—financial or operational—in the expected timeframe from the announcement of the deal. Yet, even with the deck stacked against them, financial institutions continue to be a source of significant deal activity for a variety of good reasons. So, how do you avoid becoming a statistic in an activity fraught with risk?

Begin with the end in mind—your customers. Customers in this case aren’t limited to just the acquired and existing customers, but include those who tend to be your most vocal customers: your employees. All too often, the mindset of dealmakers in financial services is focused on financials, the credit portfolio, and the capacity to gather deposits or market share. They completely forget that there are customers and clients behind all of those numbers, even though lip service may be paid.

Keeping customers front and center throughout the deal-making process increases your odds of success because it shifts the mindset in all phases: diligence through day one. Thousands of decisions go into transactions: name changes, product and service realignment, integration of sales practices, consolidation of back-offices, branch rationalization and new reporting relationships. But where do you begin?

Focus on Current and Acquired Customers

  • Analyze and segment the combined customer base during diligence. Not all banks have the same customers. Having an early understanding of the customers who are most important will have one of the greatest impacts on achieving deal benefits for the merger.
  • Build a target service model and identify the customer journey during and after integration, based on your customer segmentation.
  • Spend adequate time developing and executing tailored customer communication strategies based on your customer segmentation. Beyond regulatory requirements on minimum communications, successful institutions go beyond the typical change announcement and effectively communicate changes to customers in the way they want to receive such communication.
  • Develop and monitor customer feedback throughout the integration. Waiting until the call center is slammed over conversion weekend is too late.

Turn Your Employees into Advocates
The biggest failure in an integration is ignoring the employee experience since it is often just as important—if not more so—than the experiences your customers will have. Employees are often your biggest marketing asset and neglecting to include them and keep them informed about the transaction can turn employees into detractors. Don’t do that. Instead:

  • Be deliberate with your cultural integration. All too often, culture is overlooked during due diligence and planning, which results in nightmare scenarios later: decision making or alignment is slowed to a drip, detractors rally the masses and slow progress and unsatisfied staff talk to your customers.
  • Remember change management 101. As soon and as clearly as possible, give your employees the answer to the question “what’s in it for me?” Difficult decisions need to be made on tight timelines and employee communication of key changes and impacts throughout the integration is crucial; only communicating major changes through a press release, close announcement, and core conversion is not enough.
  • Establish a separate team to manage cultural integration and change management related efforts. This team, which is not the human resources department but can include members of it, can focus on identifying potential areas of conflict, assessing leadership strengths and weaknesses, and developing a comprehensive communications plan that engages all levels of the organization.

Create Your Own M&A “Playbook”
Successful institutions have playbooks in place and well defined target operating models ahead of a transaction, which consider all customers, external and internal.

The questions you need to answer to minimize the disruptive and risky nature of a deal are:

  • Do you know your customers? Do you know your target’s customers?
  • Do you know your culture? Do you know your target’s culture?
  • Do you know how you want to serve all customers on day one?

Achieve Tangible Results
By following a customer-centric approach, financial institutions can realize tangible benefits: accelerated decision making, faster integrations and less disruption. Making decisions with a customer-centric view minimizes status quo or one-size-fits-all choices that backfire eventually.

Finally, many banks struggle to meet the expectations of regulators who are looking more intently at integration planning and due diligence during and after the transaction. Robust and thoughtful methodologies around managing the customer experience is something regulators will view as evidence of a well-planned and lower-risk transaction. This can also act as a flywheel for execution speed on transactions for those of you that are serial acquirers.

SBICs: A Unique Way to Comply With CRA



Small business investment companies have been growing in popularity since the financial crisis, as these can help banks comply with the Community Reinvestment Act and manage interest rate risk, as Dory Wiley, CEO at Commerce Street Capital, explains in this video.

  • How SBICs Benefit Banks
  • Addressing Due Diligence Concerns
  • Making the SBIC a Success for the Bank

Minimizing the Risk of Protests During M&A


merger-2-24-17.pngBankers are in the business of managing risk, which is critical, not only in an institution’s day-to-day oversight, but also in its evaluation of strategic acquisitions. While obvious acquisition-related risks, such as credit or operational risks, may be appropriately addressed through careful due diligence, banks often overlook the more indeterminate risk that its acquisition application will draw adverse public comments.

The application review process for each of the federal bank regulatory agencies involves a notice and comment procedure through which the agencies may receive adverse comments or “protests” to an application from individuals or interested community groups. These comments are typically based upon the applicant’s Community Reinvestment Act (CRA) or fair lending records, and regardless of their merit, are increasingly employed with an apparent intent to gain leverage over the applicant.

Although the percentage of protested applications is small, the cost of a single public comment can be significant. For example, during the first half of 2016, the average Federal Reserve processing time for an application that received adverse public comments was 213 days, versus 54 days for an application not receiving comments. Even though nearly all protested applications are ultimately approved, the extended review process creates a significant amount of deal uncertainty; enhances the risk of employee and customer loss, which may diminish the value of the target; and generally results in higher professional fees. A history of protested applications may also affect the attractiveness of an acquirer’s offer to a potential target.

Fortunately, the risk of adverse application comments is not completely unmanageable. Although a bank cannot eliminate the risk of a protest, it may employ certain best practices to reduce that likelihood and minimize any related processing delays. As part of its regular CRA program, an acquisitive institution should proactively work to establish and preserve productive, two-way relationships with activist community groups, with a particular focus on groups with a history or growing reputation for application protests. Community participants who feel that an institution is listening and responsive to their needs are less likely to damage that growing goodwill through a formal application protest. These relationships should have the added benefit of enhancing the long-term effectiveness of the institution’s CRA program.

An acquisitive institution should also project a consistent, positive image in its community and be mindful about how all of the information that it provides to the public may be used. For example, a bank touting that it is “ranked first in deposit market share” should ensure that it also maintains a similar rank for meeting credit needs in its assessment area with products such as mortgages and small business loans. An acquisitive bank should also emphasize its CRA and other community service initiatives as a part of its marketing strategy.

In summary, bankers cannot avoid the risk or effects of adverse public comments in the context of regulatory applications. However, proactive and engaging institutions with strong, well documented CRA and compliance management systems are much less likely to attract public protests and will be better positioned to address those received.

Growing the Loan Book Through Automation


lending-1-25-17.pngThere are a million reasons for leveraging fintech to enhance a financial institution’s small business lending experience. To name a few, there’s better efficiency, customer convenience, profitability, speed to decision, speed to capital, cost reductions and a much-improved overall customer experience. However, one that often gets lost in the fray is the impact technology will have on the day- to-day productivity, motivation and morale of the bankers who work so hard to source and sell small business loans. This “banker experience” as it is known, plays a huge role in sales performance, retention, revenue generation and employee satisfaction.

The reality of a day in the life of a small business lender is that a surprisingly small amount of time is spent on sourcing new opportunities or even cross-solving to sell deeper into an existing relationship. Because they are shackled with the responsibility of shepherding deals through the multiple steps in the lending process, the more loan deals a banker has, the less time he or she is able to spend growing the book of business. So how are they spending their time?

  • As many as 80 percent of applications come in either incomplete or with an error on them, delaying the decisioning process and requiring the banker to go back to the client again and again.
  • Unique borrowing situations prompt the back office to request additional information requiring the banker to reach out and coordinate the collection of the information.
  • The collection of documents in the “docs and due diligence” phase of the approval process is tedious and time consuming. Bankers spend a great deal of time reaching out to applicants asking for things like: entity docs, insurance certificates, tax returns and so on.
  • Multiple teams and individuals touch each deal and as a result, things get lost, forcing the banker to invest a great deal of time and energy babysitting deals and checking on their progress from application to closing.
  • Much of the processing time is dependent upon the borrower’s promptness in getting requested information back to the bank. Bankers spend countless hours making multiple calls to collect information from clients.

I ran small business sales for a $150 billion asset institution, and our data proved that whenever a banker had as little as two loan deals in the workflow process, their new business acquisition productivity was reduced by 50 percent. Bankers with five deals in the process had their acquisition productivity diminished by 75 to 80 percent. That’s because they expend all their time and energy shepherding deals through the various stages of the process, gathering additional documentation, or monitoring the progress of each deal.

All of this is challenging for one person to do… but simple for technology to handle automatically, accurately and consistently. Technology can ensure an application is complete before it is submitted. It can ping the client for any-and-all documentation or data required. It can communicate progress and monitor a deal at every step in the lending process. Technology can also facilitate the collection of more and better data and translate that data into information that enables the banker to add value by asking great questions that help solve more problems for the customer.

When technology is used end-to-end, from application to closing, bankers are able to focus on the important things like:

  • Sourcing new opportunities.
  • Cross-solving for existing customers.
  • Preparing for sales calls and follow-up activities to advance the sales process.
  • Providing clients and prospects the value that earns trust and feeds future revenue.
  • Growing their loan book, and their portfolio revenue.

Technology makes the banker’s life simpler. When bankers are able to do what they do best, which is sell, job satisfaction, performance, job retention and morale go through the roof. And that positivity translates into improvements in the customer experience, and increases in revenues for the institution.

How Fund Administrators Can Help Private Equity and Real Estate Funds


fund-administrators.png

Fund administrators, the independent service providers that verify the assets and valuation of investment funds, are not currently as big a presence with private equity and real estate funds as they are with hedge funds. But private equity and real estate funds should take note, because fund administrators are becoming increasingly critical to how they go to market.

Fund administrator penetration of the hedge fund market is above 80 percent, and having a fund administrator has become a requirement for hedge funds of any size.

Private equity assets have risen from $30 billion in 1995 to $4 trillion in 2015. All indications are that growth will continue to be steep, as 64 percent of limited partners (LPs) plan to increase their allocation to private equity funds, which increased from 26 percent just five years ago.

Despite this dynamic in hedge funds, fund administrators have not penetrated private equity and real estate funds in the same way. Estimates are that penetration by fund administrators of private equity and real estate fund assets under management (AUM) is only 30 percent today, and projected to increase to 45 percent by 2018.

I think this growth projection is understated, however, because many of the reasons that compelled hedge funds to begin using fund administrators also apply to private equity and real estate funds.

Here are three key reasons why hedge funds had to begin working with fund administrators and why these also apply to private equity and real estate funds:

Investor Demands for Greater Transparency
I think that this is going to be the biggest driver that will force private equity and real estate funds to use fund administrators. Investors are increasingly demanding third-party validation of AUM and Net Asset Values, as well as greater transparency in reporting.

Also, operational due diligence of a fund is occurring earlier in the request for proposal process, particularly when institutional investors are factored in. Institutional investors want to have confidence in the middle and back office capabilities of the fund, which generally means a strong accounting and reporting practice.

If these investors don’t have confidence in the management company, then they will increasingly pass on the opportunity. One recent private equity study shows that 65 percent of limited partners are increasing the level of operational due diligence that they are performing on general partners.

Increasing Regulatory and Compliance Pressures
This started to materialize in the aftermath of the Bernie Madoff scandal, with acronyms like KYC/AML, FATCA and others fast becoming part of the lexicon. Conventional wisdom holds that regulatory and compliance pressures aren’t the same for private equity and real estate funds because the level of activity is less frequent. I find this argument to be short-sighted because some of these regulations already apply to fund types beyond just hedge funds.

Technology as a Requirement
Technology is already a means of differentiation among progressive private equity and real estate fund managers. My feeling is that technology should be a requirement for all of these fund managers.

Technology can provide an effective means to address the first two points, but how to best employ technology can be tricky. When it comes to technology, there are two typical approaches. The first is often for the management company to try handling it on its own, including attempting to build out the required technology itself. The second approach (often after having been unsuccessful in the first step) is for the management company to retain an external technology vendor to handle it. Either way, the experience often ends up with the same result: Managing technology on their own takes more time, personnel, and money than the fund expects.

Private equity and real estate fund managers should instead look to fund administrators to implement and manage technology that they need. Fund administrators are better suited to adopt and manage technology given that it is required by all of their fund manager clients. This is also a more cost effective solution for fund managers, because fund administrators are better suited to spread the cost of technology across their clients.

Private equity and real estate fund managers that still think they can go it alone without the help of fund administrators are going to quickly fall behind, and lose out on opportunities.

Six Tips for Negotiating a Successful M&A Transaction


merger-transaction-11-11-16.pngWhat aspect of a deal is critical to the success of an acquisition? While many in the banking industry may point to features like pricing and culture, which are certainly important, the devil is in the details. How do you protect your institution if the other party walks away from the deal? Will you have the personnel in place to ensure a successful transition? These six areas indicate where boards and management teams of buyers and sellers will want to focus their initial attention.

1. A detailed letter of intent really helps.
Putting the time in on the front-end to negotiate a detailed letter of intent (LOI) is in the best interest of buyers and sellers. The LOI is a preliminary document, and it is best to resolve any important issues at this stage. If a seller insists on a term that a buyer cannot accept, it is far better to know that before time is wasted and significant expenses are incurred while negotiating a definitive agreement. If the only substantive term in an LOI is the purchase price, then all of the other issues must be resolved among lawyers negotiating the definitive agreement.

2. Do not overlook the importance of due diligence.
The representations made in a definitive agreement supplement—but do not replace—each party’s due diligence investigation. Some important facts about a seller will fall outside the scope of the representations made in the definitive agreement. For example, the seller will disclose any actual and potential litigation against itself, but is not required to reveal litigation against its customers. If the seller’s biggest customer is facing a sizable judgment that could negatively affect its ability to repay its loans, a buyer will have to conduct detailed due diligence to uncover this fact. Further, due diligence is not just for buyers. The seller needs to critically examine the buyer if shareholders are taking the buyer’s stock in the transaction.

3. Be thoughtful about drop dead dates.
A drop dead date is the date on which a deal must close before either party can terminate the definitive agreement without incurring a penalty. Calculating the correct drop dead date is more art than science when balancing the number of actions that must be taken pre-closing—especially regulatory and shareholder approval—with the parties’ desire to get the deal closed as soon as possible. At the same time, an agreement with a short time period between signing and the drop dead date encourages the parties to take the necessary pre-closing actions expeditiously. Striking the proper balance between these two competing factors is key. In the event of a contested application, the time required to receive regulatory approval will be at least twice as long as expected.

4. Be prepared to negotiate termination and related fees.
Termination fees, which are paid by a seller to the buyer if the seller accepts an unsolicited superior proposal from a third party, are common, but the amount of the fee, and the triggers for paying it, are frequently negotiated. Expense reimbursement provisions payable to the nonterminating party are perhaps equally common, in terms of prevalence and contention of the amount. Far less common are termination fees to be paid by the buyer to the seller if the buyer terminates the transaction. These reverse termination fees are generally resisted but can be appropriate in certain circumstances, such as situations where the buyer must obtain shareholder approval for the transaction.

5. Consider the treatment of critical employees.
Buying a bank is obviously more than buying loans and deposits. Integrating the seller’s employees is critical to a successful transaction. Buyers should consider establishing a retention bonus pool to ensure that critical employees remain with the combined enterprise after the transaction (and at least through conversion). A critical employee may not be obvious—frequently they are the unsung backroom employees who keep things running smoothly—and doing right by them will help ensure a successful integration.

6. Be aware of board dynamics.
It’s relatively common for the CEO and CFO to negotiate the sale of their bank and for the deal to include a meaningful pay package for the two of them. The deal is presented to the board and, right or wrong, the board is highly skeptical of the agreement that the executives cut. In this instance, the board’s advisers can help the directors clearly assess the merits of the transaction without the distraction of potentially questionable motivations.  

The Three Top Reasons For Vendor Consolidation


vendor-manangement-11-8-16.pngWhy should banks and credit unions consider consolidating their vendor relationships? Here are three top reasons why:

1. Save Time And Money
Banks and credit unions that reduce the number of their vendor partnerships can increase their operational efficiency and productivity. When an institution partners with multiple vendors, typically that means staff has to deal with multiple back-end systems, often accessing each system numerous times a day and struggling to keep abreast of all of the updates for every system. Sometimes, staff is even unnecessarily bogged down with having to deal with duplicative systems from multiple vendors.

Consolidating vendor relationships also can significantly reduce the amount of training for staff as well as for customers. Bank and credit union staff typically has to train customers on how to use vendors’ private-labeled portals, and that can be time-consuming, particularly if a financial institution uses multiple vendors with multiple portals. But if an institution uses the same vendor for multiple solutions that all have the same look and feel and the same technology, then training of both staff and customers is significantly reduced.

When banks and credit unions are able to negotiate fewer contracts, they can conduct less due diligence on potential vendors, as well as get more for their money by reducing the amount of monitoring and reporting required for risk and assessment compliance. On the other hand, having multiple contracts with multiple vendors adds even more burden to staff because they will also have to monitor different contract term dates for renewal, and then they’ll have to determine how one expiring contract could impact solutions from other vendors.

Furthermore, when a bank or credit union uses fewer vendors, the institution has more negotiating power because it frees up more dollars with the remaining vendors. The higher the volume provided to a vendor, the more likely they will offer their best pricing resulting in lower cost.

2. Save On Vendor Due Diligence
Financial institutions are increasingly responsible for keeping up with the third-party vendor management requirements of the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Federal Reserve, and for state-chartered institutions, the requirements of state regulators.

For example, the FDIC’s Guidance for Managing Third-Party Risk (FIL-44-2008), provides four main elements of an effective third-party risk management process: risk assessment, due diligence in selecting a third party, contract structuring and review and oversight. But today, there’s even more heightened scrutiny, as a number of high-profile security breaches of major vendors has caused regulators to make sure that financial institutions are actually taking all the necessary steps spelled out in the regulations, such as the IT handbook of the Federal Financial Institutions Examination Council (FFIEC).

Banks and credit unions can find it very time consuming to conduct the proper due diligence and ongoing monitoring on each vendor. By partnering with a one vendor, financial institutions can significantly reduce their compliance burden.

3. Help Customers
Consolidating vendors can enable banks to greatly elevate the experience for their customers, by providing a single platform that is easy to navigate. Banks may also have access to additional monitoring and reporting of customer activity to help prevent and detect fraud.

Vendor consolidation can provide substantial return on investment by saving time and achieving cost savings, as well as reduce regulatory burdens by providing the right monitoring and reporting to meet compliance requirements. Partnering with a one vendor can not only save time and money and boost return on investment, but also enhance customer loyalty by elevating the user experiences on the platform.

Team Lift-Outs: Compensation to Entice and Integrate Revenue Producers


A “lift-out” is often used to describe the hiring of a group of individuals from the same company who have worked well with each other and can make an immediate and long-term contribution. A successful lift-out can create financial gain or provide competitive advantage such as replacing or crowding out a competitor. It can help expand the bank’s geographic markets or solidify its existing footprint.

Lift-outs, however, are not without risk. Management that becomes too enamored with a team can overlook essential steps required to determine whether it would be accretive. Inadequate due diligence or simply “paying up” on compensation without having a reasonable understanding of the expected results can cause a myriad of issues. In order to mitigate the risk, bankers should follow a standardized process, as outlined below:

Stages of a Successful Lift-Out

Initial Conversation Due Diligence Team Transfer Cultural Integration
Bank and team leader discuss potential market opportunities and competitive advantages. Team leader gauges interest of other members, develops market projections and business plan for the bank’s review. Both sides investigate reputation, culture, resources and viability of a union. Team joins bank and transfers client relationships in accordance with any contractual agreements. The bank plans for and announces the acquisition of the team internally and externally. The team, which is now on the bank’s operational platform, becomes fully integrated and establishes relationships with other groups within the bank.

The compensation structure for the lift-out team should also support the four stages:

During the Initial Conversation stage, discuss high-level compensation expectations. Often, these conversations provide insight into the team’s current compensation levels and programs. It can help the bank determine whether the team can easily fit into the current compensation structure or whether additional compensation is required to entice the team to come onboard. If additional compensation is required, it is important to determine (i) how much?, (ii) in what form?, (iii) for how long?, and (iv) whether it will create any internal equity or pay compression issues for existing talent.

During the Due Diligence stage, the bank must determine compensation levels that are commensurate with the economic value of the lift-out. Understanding the amount and the timing of each team member’s individual production is essential. It can also help the bank make the determination about which team members are essential and truly accretive. Determining the expected production streams can help determine who needs a compensation package outside of the current structure and who within the team could readily be integrated into the current structure.

It may be helpful to create a program where the additional pay phases out over a period of time or is only paid if the individual (or team) meets the production expectations agreed on at the time of the lift-out. For example:

  • Special equity awards could vest based on the achievement certain levels of production within a specified period of time or could cliff vest (e.g., after 3 years) providing time to assess talent prior to vesting
  • Special bonuses could be paid if certain levels of production are achieved.

During the Team Transfer stage, care should be taken to address any internal equity concerns and ensure that non-competition/non-solicitation commitments are upheld.

Possible rationales for accepting differing levels of compensation among like positions could include the limited nature or timing of the differences or the financial impact of the additional revenue stream.

Revenue producing roles are increasingly subject to non-competition and non-solicitation agreements. To avoid litigation, it is extremely important to ask lift out team members for any documents that involve their interaction with clients or the solicitation of former employees. The bank should review these and seek the advice of legal counsel.

During the Cultural Integration Stage, the Bank should assess whether pay differences should (a) remain given the structure and/or economics of the team or (b) be discontinued.

Maintaining pay differences makes sense if the team continues to outperform or if the group is highly-sought after by other institutions. However, if the results are commensurate with those in similar roles, it may become increasingly divisive to maintain special programs. Integration into the existing pay programs is a more natural choice.

In summary, team lift-outs provide a way for banks to accelerate growth by acquiring, rather than developing, proven revenue producers. Thoughtful management of compensation during the stages of a lift-out ensures that individuals are enticed to move and are motivated to produce for the bank.