09 Nov A Climate for Banking Expansions

Higher interest rates are good news for banks, as it directly increases their cash holdings. With the increase in funds, banks can invest it internally to utilize the injection for an expansion or acquisition. When scaling any business, especially a small- to mid-sized bank, there are best practices to employ and ensure a successful expansion.

Merger and Acquisition Due Diligence

Conducting loan valuation will be the largest and most important step during an acquisition. A bulk of the effort will focus on the basic valuation principle of identifying the liquidity of the loan portfolio. The acquiring bank will also want to analyze the types of loans within the portfolio, as that can profoundly impact its value. For example, portfolios consisting largely of real estate-related loans is seen in a more negative context due to the market’s history. Additionally, after the residential write-off reduction change in the Tax Cuts and Jobs Act (TCJA), the value of real estate loan portfolios declined even further, which may change acquisition strategies.

Internal Scalability

Growing from 50 to 100 employees is a big step for any business, which can create additional, new problems. Maintaining employee happiness, loyalty and productivity will be critical to the success of the acquisition. Offer an open line of communication for employees to ask questions about their future with the company. Listen to the teams of employees and work hard to keep them happy, as a corrupted culture can cause an acquisition to lose its footing fast.

Smooth Operations

In addition to finances and loan portfolios, analyze the internal operations to identify any weaknesses and inefficiencies. Additionally, evaluate the relationships the bank has with its employees, partners and lenders. Are payments late or missed? Discover if issues are from poor internal processes, deteriorated relationships or poor loan decisions. The solution can range from an easy fix to an unsolvable problem that may prevent a toxic acquisition.

As with any industry, small- and mid-sized financial institutions have business goals and objectives to meet. Working with a qualified business attorney to conduct due diligence, prepare the workforce for scaling and analyzing operating procedures can greatly increase the chances of long-term success and growth.