Bank deal-making is getting even more competitive

Learn about the impact mergers and acquisitions are having on the financial services industry — as well as best practices if your organization is considering an M&A — in the latest BAI Executive Report.

Neither rising interest rates nor escalating recession worries have stopped the U.S. banking industry’s deal-making binge—according to KPMG, merger and acquisition volume in the first quarter of 2022 was down only single digits compared with the same quarter of 2021, which was a record year for M&A activity.

Other bullish indicators: Bain & Company foresees that up to half of revenue growth for banks will be derived from M&A in coming years (currently 35%) and that the competition for deals will intensify as more private equity and technology firms get into the game.

We take stock of the current merger landscape and identify future drivers in this month’s issue of the BAI Executive Report.

In our lead article, contributing writer Dawn Wotapka gets into the key factors driving the ongoing M&A flurry in banking. Not surprisingly, pursuit of scale to be more competitive and low financing costs are at the top of the list. In addition, well-resourced fintechs are stepping up their efforts to spend their way further into banking.

Wotapka writes that one result of the frenzied marketplace is that banks are taking a more sophisticated and systematic approach to evaluating would-be takeover targets—they are acting more like PE or venture capital firms in terms of their due diligence and greater emphasis on identifying deeper sources of value within deals.

“In the past, ‘integrate first and transform later’ was a common M&A mantra,” one financial industry veteran says. “The best bank acquirers have already replaced that with ‘buy and transform now.’”

Despite heightened due diligence, there are still plenty of ways for a deal to not live up to the rosy vision offered at the announcement, such as overpaying, customer churn, culture mismatch and unexpected credit issues buried on the balance sheet.

Our article from contributing writer Katie Kuehner-Hebert explores this long list of possible pitfalls, and what both sides of an M&A event can do to chart a smooth course to closing. Taking a cleareyed view of synergies is critical, she writes, along with being just as clear in internal and public communications about the merger’s impacts.

And while it’s the high-dollar deals that grab the headlines, many small community banks and credit unions are also playing an active role in M&A by gobbling up even smaller banks in their pursuit of more heft.

Among the busiest acquirers is GreenState Credit Union, an Iowa institution with about $8 billion in assets. In just the past two years, GreenState (formerly the University of Iowa Community Credit Union) has taken out four small banks in the Midwest, with the most recent purchase providing access to suburban Chicago.

I recently spoke with Jeff Disterhoft, GreenState’s president and CEO for more than two decades, about his ambitious M&A plans, which have gotten him crosswise with community bank groups that say credit unions have an unfair financial edge in the merger market due to their tax-exempt status.

Disterhoft agrees that not having to pay state or federal taxes is probably an advantage, but he maintains GreenState offsets that advantage by the financial benefit with its members via deposit and loan rates.

Also in this month’s Executive Report:

Mergers are a test of people and processes: Rick Hall from BKM Marketing takes the view that an M&A event can measure how effective a bank’s leadership team has been in building a business that can adapt to future change. He says acquiring banks are taking a different approach to integrating new acquisitions post-pandemic, particularly in how they make incoming talent feel at home.

Ready data can smooth an acquisition: Curt Raffi from Bottomline Technologies tells us that banks and credit unions must take a proactive approach to ensure customer engagement throughout the M&A journey. He says purposeful data analysis and application can be invaluable in identifying ways to broaden and deepen relationships, as well as in spotting potential red flags such as clients having trouble with the transition.

Change events threaten consumer loyalty: Terri Panhans from Vericast writes that the disruption that often accompanies an M&A event can lead to high levels of customer concern and churn. She acknowledges that, while financial institutions stress their commitment to helping customers through times of significant change, many fail to allocate the resources needed to make good on those commitments.

Terry Badger, CFA, is the managing editor at BAI.

Learn how financial services organizations can prepare for and capitalize on M&A growth opportunities in “Bank M&A is here to stay.”