A single strand of natural fiber, such as cotton or hemp, is typically weak. Yet, when multiple strands of fiber are woven together into pieces of string, which are then braided or spun together with several other pieces of string, the rope that results can be extremely durable. Even though natural fibers are significantly weaker than synthetic materials, depending on how it is constructed, even a 1-inch rope made of natural fibers can pull or lift several thousand pounds.Much like interweaving pieces of string can enhance their durability by multiples, a growing number of financial institutions are joining forces with similarly sized competitors to bolster their chances of success. Faced with rising expenses and heightened competition from both larger peers and an ever-expanding number of non-traditional financial institutions, a growing number of community financial institutions (CFIs) are turning to mergers of equals (MOE) in an effort to ensure their longevity. Deals such as last summer’s merger between Southern California Bancorp and California Bank of Commerce and the recently completed merger between Berkshire Hills Bancorp and Brookline Bancorp are examples of the rise in MOE activity among CFIs that has been taking place over the past decade or so — a trend driven by motivators ranging from cost efficiencies to operational efficiencies, among others. Unlike bulge bracket banks with deep pockets and the ability to quickly adopt cutting-edge technologies and services, and fintechs that don’t have the expenses of brick-and-mortar locations, CFIs are struggling with issues such as rising costs for compliance and technology, ongoing inflationary pressures, and even succession challenges. As CFIs find it increasingly difficult to remain profitable amidst heightened operating costs and more competition for core deposits, and faced with fewer banks that are available to acquire, when it comes to like-sized competitors, a growing number of organizations are embracing the adage “if you can’t beat them, join them.”Advantages of MOEsJoining forces with like-sized peers through MOEs can be an attractive prospect. When done right, such mergers can provide the benefits of scale and operational efficiencies, allowing parties on both sides — employees and shareholders alike — to hold onto many of the qualities each organization possessed prior to merging. Unlike M&A deals where a target financial institution is acquired by a larger competitor, MOEs also make it more likely that the parties on both sides can maintain their business strategies, company cultures, and philosophies.The following are a few of the biggest drivers of the trend:
- Margin resilience. As CFIs continue to grapple with the impact of ongoing high interest rates, such as reduced borrowing activity and lower deposits, the greater size and scale achieved through MOEs can provide more flexibility for managing interest rate risk and allow for sustainable profitability.
- Technology. Remaining competitive necessitates providing customers with the latest technological offerings, particularly mobile banking services. However, upgrading existing technology, especially core operating systems, can be prohibitively expensive. Joining forces with like-sized peers can be a good way for MOE participants to access the funding necessary for upgrades. Amidst a growing shortage of qualified IT experts versed in emerging technologies such as artificial intelligence, such mergers can also be a good way to enhance overall employee expertise.
- Expense efficiencies. Amidst rising operational costs in all areas, joining forces with another organization can enable CFIs to strengthen their overall financial position, combine resources, and eliminate redundancies among staff.
- Compliance. Rising compliance costs have been a major pain point for CFI in recent years. Combining with a similarly sized organization through an MOE can help make the costs of compliance more manageable for the larger entity that results.
- Succession planning. With many Baby Boomers heading towards the exits or having already retired, many financial institutions are dealing with the loss of institutional and industry expertise and are finding it difficult to recruit the next generation of leaders. MOEs can be a good way to plug gaps, whether there is already existing expertise on one side of the merger, or because the larger organization created is likely to be a more attractive opportunity for young professionals than either of the individual parties would be on their own.
- Preserving shareholder value. Unlikely acquisitions, where shareholders can be prematurely pushed out of their original investments or find themselves invested in an organization drastically different than what they originally chose to invest in, MOEs can often be beneficial for shareholders. MOEs also tend to be less expensive than traditional M&A deals.
- Broader reach. As organic growth becomes harder to accomplish, MOEs can be a good way to enhance CFIs’ reach into new areas and to broaden their product offerings.
- Enhanced customer service. Combining forces can give CFIs the finances and manpower necessary to enhance their offerings for customers, particularly the digital experience customers have.
Amidst increased competition on multiple fronts and rising costs across the board, MOEs can be an attractive prospect for CFIs looking for ways to ensure their long-term viability. From cost cutting to operational efficiencies and the ability to boost their size and reach, MOEs can be an attractive prospect as long as they are thoughtfully approached and all parties are on the same page about the desired outcome for the newly combined entity from the get-go.
