In 2016 we wrote about common challenges that financial institutions face during a merger or acquisition. It has remained one of our most popular blogs, so we’re revisiting the topic, including M&A trends we’ve seen in the past couple of years.
Financial institution M&A trends
Mergers and acquisitions have increased in recent years for both banks and credit unions. From 2016 to 2017, bank M&As increased by 6%. Meanwhile, CUNA Mutual Group expects the number of credit unions to decline by 250 annually over the next two years, due to merger, acquisition or liquidation.
Bank and credit union M&A deals have grown at similar rates. The period of 2015 through 2017 saw 774 bank deals and 670 credit union deals. Another trend we’ve seen is credit union deal size increasing, along with some credit unions beginning to acquire banks—both of which will create larger credit unions set to compete with large banks.
There are a number of factors driving the increasing mergers and acquisitions, including the following.
- Great recession: In the fallout since the great recession, many institutions who were able to weather the tough period are now in good financial standing, while institutions who struggled may still be cash-strapped. That means there are institutions well positioned to execute an M&A deal, with others that could use the financial help of a merger or acquisition.
- Political environment: During the Trump administration thus far, stock prices have increased, interest rates have risen and the economy has expanded, providing more financial opportunities for strong banks and credit unions.
- Regulatory conditions: The tax reform package passed in 2017 reduced the effective tax rate, helping with bank and credit union earnings. Meanwhile, the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act increased the threshold for which financial institutions are subject to more oversight. Lenders before tried to remain under $50 million to avoid the additional oversight, but now are able to merge or acquire while staying under the new $100 million (and eventually $250 million) threshold.
- Technology: Technology is becoming critical for financial institutions of all sizes, but the costs of implementing emerging tech are felt more by smaller lenders, leading to more mergers and acquisitions.
- Aging leadership: Until 2030, 10,000 baby boomers will reach retirement age every day. That means leadership and board members are retiring at unprecedented numbers, and institutions without solid succession plans are deciding just to sell.
As M&A activity continues to increase, challenges with M&As remain similar to 2016 for financial institutions.
- Lack of organization on one party or other can cause huge complications and time delays.
- Troubled assets are often uncovered during the M&A process, introducing unexpected issues.
- Employee satisfaction and retention can suffer if there is poor communication and/or training during and after a deal goes through.
- Merging the two cultures can also be troublesome if not approached the right way and can negatively impact the transition and aftermath.
- Several key internal processes are disrupted during a merger or acquisition, including operational tasks, strategic planning, reporting, onboarding and training, and more.
- Property tax concerns and delinquencies can slip through the cracks during the complex M&A process.
How to overcome challenges for a successful transition
As M&A activity grows, banks and credit unions must organize and prepare as far in advance as possible, including the following areas.
- Make a strategic plan as early as possible in the process, including employee communication and training, client communication, how to merge and maintain critical processes, how to strategically merge the two cultures, and how to make sure nothing slips through the cracks.
- Get your portfolio in order, ensuring all data is correct and up-to-date, and that there are no real estate tax delinquencies.
- Working with a 3rd party vendor is often the most successful way to ensure a smooth transition with all the complicated components and moving parts.
Financial institution M&A transactions will likely continue to grow given today’s political, economic and regulatory climate—but these deals are complex and often uncover problems. Get more M&A guidance in this free ebook, Overcoming challenges with internal processes during a merger or acquisition.