After rebounding in 2021, bank merger and acquisition, or M&A, activity slowed again in 2022, a trend that is likely to continue.
In this economic environment, growth-oriented organizations need to make the most of the limited acquisition opportunities they find. To maximize the potential of sought-after deals in 2023, bank directors and executive teams should recognize the current critical factors that contribute to successful acquisitions.
Bank M&A activity accelerated in 2021 from 2020’s pandemic-depressed levels, but the pace fell off again in 2022. By the end of the third quarter, only 123 deals had been announced, compared to 160 deals over the same period in 2021, according to S&P Global Market Intelligence.
The 2023 Bank Director M&A Survey suggests this situation will probably continue. Although 85% of survey respondents said their banks either plan to be active acquirers or were at least open to acquisitions, only 11% said they were very likely to acquire another bank in 2023, and 28% said they were somewhat likely.
Even fewer said they expect to acquire nondepository business lines, such as wealth management, fintechs or other technology companies. So although conventional acquisitions likely will remain the most common type of transaction during 2023, bank M&A activity overall could remain sluggish.
With fewer opportunities available, the success of every deal becomes even more crucial. Bank boards and executive teams must take care to increase the likelihood that acquisitions produce expected results. Four critical success factors can greatly improve the chances, particularly in the bank-to-bank acquisitions that could make up most of 2023’s activity.
1. Detailed analysis of the loan portfolio. Loan quality always matters, but with a potential industrywide increase in credit losses on the horizon, a buyer having a granular understanding of the seller’s loan portfolio is essential to determine if its allowance for losses is adequate.
Current economic expectations and likely rate changes during the interval between a deal’s announcement and completion mean it is important to analyze the portfolio as early as possible during due diligence. Advanced data analytics can help acquiring banks identify patterns – such as certain loan types, industries, geographic areas, and loan officers – that merit special attention.
Additionally, banks should prepare loan valuations as a part of due diligence. They should include expected rate increases in that analysis, as it is important to home in on the metrics that suggest the quality of the deal.
2. In-depth understanding of the deposit customer base. In addition to reviewing loan customers during credit due diligence, it’s important that prospective buyers also analyze the deposit customer base. Changing interest rates mean liquidity can become a concern if customers leave for higher returns or online competitors.
Pinpointing top customers, identifying the services they use, quantifying the revenue those relationships generate and developing customized communication plans to ease the transition are prudent initial steps. These plans should assign specific responsibility for communicating with customers; management should be ready to implement them immediately upon the transaction announcement, when such accounts become particularly vulnerable.
3. Proactive talent management. Although banks normally eliminate or consolidate positions in an acquisition, they still need to retain the best talent. Losing personnel with critical skills could jeopardize the investment thesis of the transaction; banks should identify these individuals before announcing the transaction. Consistent and open communication helps preempt rumors and minimizes employee uncertainty, while early retention bonuses and other tools can target essential team members who might be vulnerable to poaching while the transaction is pending.
Fair treatment for those who leave is also important. Outplacement services, severance packages, and other transition programs are worth their one-time costs for buyers, since they can help assuage negative community perceptions that could escalate quickly on social media.
4. Effective technology integration. Not every bank has adapted to digitization in the same way or at the same speed. Glitches in routine processes, such as online account access, direct deposits or electronic funds transfers, can alienate customers and employees, creating a bad first impression for the blended organization.
A gap analysis that identifies differences in virtual banking, remote workplace policies, fintech relationships and other technology issues is an important early step to successful M&A. This analysis should be followed quickly by a comprehensive technology integration plan that draws on the best ideas from each organization.
In view of the mixed bank M&A outlook for 2023, addressing these four broad issues can help bank directors and executives meet their fiduciary responsibility to recognize potential opportunities, while still managing the risk that is inherent in today’s banking environment.
Content created by Crowe and originally published on bankdirector.com on Jan. 17, 2023.
