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Mergers & Acquisitions Growing: What Does it Mean for Your Institution?

Kate Stoneburner
April 7, 2022
Read Time: 0 min

The Key to Successful Mergers & Acquisitions

Mergers and acquisitions are a great way to get ahead, but what might consolidation mean for your institution?

You might also like this webinar, "Mergers & Acquisitions in a CECL Environment."

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Consolidation Trends
Mergers & acquisitions are on the rise

Today’s financial marketplace is challenged by increasing regulation, high expectations for fast and mobile financial services, and new fintech companies joining the already competitive arena. For many institutions, a good strategy to stay on top is pursuing mergers and acquisitions. Community banks with small asset sizes might merge with other small institutions whose branches complement one another, and larger banks may acquire smaller ones whose services fit their offerings.

Due to their many benefits, mergers and acquisitions are on the rise. A poll of Abrigo’s recent mergers and acquisitions webinar audience found 35% in the process of acquiring and 41% considering merger and acquisition activity in the near future. Nationwide, the outlook on financial mergers and acquisitions is also trending higher. When these consolidations go smoothly, benefits include:

  • enhanced market power
  • more room for expansion without the cost of brick-and-mortar investments
  • the ability to provide a variety of services
  • a more diverse customer base to draw from.

But it’s essential that your institution prepares well before embarking on a consolidation venture. This includes making sure that you:

  • know your target bank inside and out
  • have internal processes streamlined to avoid extra hassle during integration
  • understand the short- and long-term impacts of a long-term investment like a merger or acquisition

It may be wise to consider Bank Secrecy Act (BSA)/anti-money laundering, asset/liability management (ALM), or exit pricing advisory services to help with these issues and more.

A Good Match?
Know your target institution

One of the first steps of acquisition is spending time getting to the acquisition target’s credit quality and credit processes. If your institutions are a good match, the financial analysis of an acquisition is usually straightforward. The next step is to decide how the banks match up culturally. Not only are there in-house factors to consider, such as staffing proficiency, gaps in expertise, and niche markets to learn about, but if the institutions have dissimilar outlooks on security and compliance culture or widely different loan policies, due diligence requires you to assess potential concerns. Review every aspect of the bank and understand its strengths and weaknesses to have a clear vision of how the acquisition will fit into your organization and where changes will need to be made.

In a perfect merger, both banks are compliant, risk-based, and consistent with each other’s policies and procedures. However, not all policies and procedures are created equal, and different risk profiles and risk tolerance levels can create more work for your institution. When two financial institutions come together, the AML and fraud compliance functions will need to be consolidated. A compliant Anti-Money Laundering (AML) program can determine the success of a merger or acquisition. Integrating programs creates challenges for BSA Officers responsible for developing an integration plan while ensuring ongoing compliance with existing day-to-day tasks. Understanding the mission-critical analysis, best practices, and risks of BSA/AML compliance – no matter what side of the transaction you are on – can determine the success of the transaction and assist in avoiding penalties. If your institution’s BSA Office or staff needs support to ensure ongoing compliance while planning for or executing a deal integration, consider temporary staffing assistance to help with short-term needs.

Proactive Planning
Get organized

Even if a merger or acquisition looks great on paper, any weak links in an institution’s data processes, report production, or regulatory compliance systems will come to light during the acquisition. Realistically assess your organization before taking on another institution. Does your staff have the bandwidth to manage a bigger or more complex organization? Integrating an acquisition is far more time consuming than you might imagine, and the task becomes challenging when your internal processes need work. Outsourcing some or all of the ALM model or getting help with monthly ALM reporting can ease the burden.

If, on the other hand, your institution is considering joining a larger bank or credit union, the time to identify weaknesses and remedy them is before the investment bankers begin kicking the tires. Shoring up your application processes or streamlining your underwriting ensures your shareholders receive full value on exit.

One area to keep in mind when considering an acquisition is the potential for regulatory changes and your institution’s ability to adapt to them. For example, adopting the current expected credit loss standard (CECL) requires a well-planned strategy and ample time dedicated to the operational and technical transition. For acquisitive financial institutions, the required efforts might be elevated, as CECL will change how public and private financial institutions account for these acquired assets. Potential changes to portfolio risk standards add another layer of complexity to mergers and acquisitions, so be sure your organization is on top of its game before adding another to the mix. In some cases, it makes sense to consult a third party for assistance, either with outsourcing CECL implementation or exit pricing valuation and disclosures.

Forward Thinking
Understand long-term investment

It’s easy to see how alluring acquisitions look in the short term. Institutions get to keep acquired bank’s customers, reduce expenses, divide work across more employees and earn higher profits. But acquiring a bank is a long-term investment that has just as much potential to cost money as to save it. If the BSA/AML and asset/liability management areas above are not properly prepared for and addressed, the financial outcome of consolidation will be in jeopardy. Bank culture differences can cause an acquiring bank to lose a significant part of the acquisition’s customer base, or cause key employees to leave, resulting in a poor return on investment. Even more grim is the effect that inadequate AML and fraud programs can have on mergers, resulting in regulatory penalties or hard dollar fraud losses. And if an institution has not streamlined ALM or portfolio risk processes, combining with another institution will mean much more backtracking to stay organized and compliant.

There are many critical steps to consider when developing a consolidation plan and making decisions around how to build your combined team. If your institution is considering a merger or acquisition, help from an advisory team can get your BSA and ALM processes up to scratch before taking the leap. A successful acquisition is about hard work that is actively planned and carefully managed over time. With help, your organization can reap the benefits of the investment for years to come.

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About the Author

Kate Stoneburner

Content Marketing Manager
Kate Stoneburner is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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