Bank Board Letter May 2015 : Page 2

In addition, Embrace manages customer engagement to advance the bank’s brand and provide cross-sell opportunities. When a bank outsources its lending operations to another fi-nancial institution, it often merely sends customers to another bank that is already known to the customer. Instead, Commerce partnered with Embrace, which private-labeled its mortgage products, enabling the bank to offer consistent service across all product lines as well as extend its brand through Embrace to communities it might not reach otherwise. This not only helps maintain superior service with existing customers, but also reaches prospective new customers. Embrace is also capable of cross-selling Commerce Bank’s other products and services, unlike a bank partner that might cross-sell its own. Every action Embrace takes is deliberate and strengthens the bond between Commerce and its customers Ð critical to the $1.9 billion Massachusetts bank. By partnering with Embrace, Commerce Bank now of-fers mortgage loan products to new and existing customers throughout Eastern Massachusetts. Whether the borrower is a first-time home buyer, moving out of one home and buying another, buying a vacation home or investing in property, Commerce Bank offers programs and rates for almost all home-buying needs. In addition, the bank offers refinance options to help lower monthly payments, pay off mortgages faster, consolidate bills and get cash out of the equity in the home. Commerce Bank also has access to Embrace’s QuickCLOSE7 process and its APPROVED to MOVE program, providing even more of an edge over the competition. QuickCLOSE7 can have loans cleared to close in just seven days from appli-cation and APPROVED to MOVE completely pre-approves customers before they shop. The application is fully underwrit-ten based on income and credit. Because the bank now offers mortgage products, not only is it fulfilling its customers’ expectations and doing so with superior service, it’s now in a position to increase profitability and remain competitive among other local institutions and large national banks. Commerce knew that offering mortgages was essential to its success, and by outsourcing, it is now avoiding the conun-drum that so many banks currently face. Dennis F. Hardiman is founder and CEO for Embrace Home Loans, an approved lender for FHA, VA and an approved seller servicer for FNMA, FHLMC and GNMA. For more information, contact Jacqueline Weed at jWeed@embracehomeloans.com or visit www.embracehomeloans.com/affinity. Mergers of equals and other Mistakes By Shahin Clark M ergers and acquisitions are highly attractive to banks that seek to expand while reducing overall costs. There are considerable opportunities to save through a reduction in workforce, consolidation of operations and eliminating overlapping or unprofitable branch locations. Other significant costs, such as the core system, can often be cut in half. Although mergers and acquisitions present opportunities to ensure the finan-cial health of banks, they should pay attention to several areas that affect costs and revenue, such as grandfathered accounts, mergers of equals, hidden labor costs and a lack of quality control. During a merger or an acquisition, some financial organizations decide to declare certain account types as grandfathered accounts, either contractually or verbally. These accounts stay intact with no changes during the conversion. Going forward, if accounts are in waived status, or are not subject to certain fees because they were established prior to current practices, these accounts can be carried forward with no changes after the merger. However, depending on the number and size of these accounts, the cost to the bank and the loss of revenue can be extensive. Additionally, the bank often ends up with too many account types, forcing personnel to Next moNth: Prepaid Cards Become mainstream managing Information Security Risks overextend themselves to service these accounts according to dif-ferent requirements. Many times, the information pertaining to these grandfathered accounts is not readily available to all bank personnel, especially branch staff, making these accounts even more difficult to manage. When undertaking a merger or acquisition, the mergers of equals process is complex and presents many opportunities for errors. Keeping two equivalent C-level executives for an extended period of time after a merger slows down the decision-making process and adds significantly to overhead costs. These are the highest-paid positions at the bank; hence maintaining this redundancy nega-tively affects the bottom line. During the merger process, some tough decisions have to be made affecting personnel and depart-ment eliminations. With two CEOs, important decisions are not always made in a timely fashion because the executives may have different perspectives. Many banks ignore hidden labor costs during mergers. It is very common, especially in smaller community banks, for personnel to perform many tasks outside of deposit or loan operations. Often dur-ing a merger, when the most obvious departments are consolidated, only a deep analysis of the tasks performed by bank personnel would reveal other hidden labor costs. The correct process is to identify and consolidate these roles to reduce costs and improve efficiency. For example, four years after a $200 million asset bank was acquired by a $1.1 billion asset bank, management conducted a workflow analysis and discovered that more than $750,000 in unnecessary labor costs was spread throughout various departments of the acquired bank. Mergers offer a multitude of ways to lose annual revenue, one of which is a lack of quality control during a core conversion. Analysis

MERGERS OF EQUALS AND OTHER MISTAKES

Shahin Clark


Mergers and acquisitions are highly attractive to banks that seek to expand while reducing overall costs. There are considerable opportunities to save through a reduction in workforce, consolidation of operations and eliminating overlapping or unprofitable branch locations. Other significant costs, such as the core system, can often be cut in half. Although mergers and acquisitions present opportunities to ensure the financial health of banks, they should pay attention to several areas that affect costs and revenue, such as grandfathered accounts, mergers of equals, hidden labor costs and a lack of quality control.

During a merger or an acquisition, some financial organizations decide to declare certain account types as grandfathered accounts, either contractually or verbally. These accounts stay intact with no changes during the conversion. Going forward, if accounts are in waived status, or are not subject to certain fees because they were established prior to current practices, these accounts can be carried forward with no changes after the merger. However, depending on the number and size of these accounts, the cost to the bank and the loss of revenue can be extensive. Additionally, the bank often ends up with too many account types, forcing personnel to overextend themselves to service these accounts according to different requirements. Many times, the information pertaining to these grandfathered accounts is not readily available to all bank personnel, especially branch staff, making these accounts even more difficult to manage.

When undertaking a merger or acquisition, the mergers of equals process is complex and presents many opportunities for errors. Keeping two equivalent C-level executives for an extended period of time after a merger slows down the decision-making process and adds significantly to overhead costs. These are the highest-paid positions at the bank; hence maintaining this redundancy negatively affects the bottom line. During the merger process, some tough decisions have to be made affecting personnel and department eliminations. With two CEOs, important decisions are not always made in a timely fashion because the executives may have different perspectives.

Many banks ignore hidden labor costs during mergers. It is very common, especially in smaller community banks, for personnel to perform many tasks outside of deposit or loan operations. Often during a merger, when the most obvious departments are consolidated, only a deep analysis of the tasks performed by bank personnel would reveal other hidden labor costs. The correct process is to identify and consolidate these roles to reduce costs and improve efficiency. For example, four years after a $200 million asset bank was acquired by a $1.1 billion asset bank, management conducted a workflow analysis and discovered that more than $750,000 in unnecessary labor costs was spread throughout various departments of the acquired bank.

Mergers offer a multitude of ways to lose annual revenue, one of which is a lack of quality control during a core conversion. Analysis of a $25 billion asset bank in New York City showed that numerous accounts were not accurately linked to the bank’s existing pricing structure during an M&A core conversion. This lack of quality control cost the bank more than $1.5 million in recurring annual revenue. An extensive and systematic analysis of all of the bank’s products to see how each was performing ultimately generated $1.5 million of additional revenue.

During the M&A process loan review quality control should be given more attention. To avoid increasing loan loss reserves and writing off loans shortly after the acquisition, bankers should spend enough time on reviewing loan quality and accurately assessing loan deterioration.

Many of these mistakes are avoidable with the correct precautions. Any bank executive who has been involved in the M&A process knows that finishing a successful merger and getting back to regular operations is foremost on everyone’s mind. This is understandable, because the process is very time-consuming and requires cohesive interaction among all levels of expertise. In order for banks to experience the greatest success, bankers ought to take the time to analyze each of these facets of the merger and acquisition process.

Shahin Clark is CEO and co-founder of Lodestone Banking, a provider of comprehensive revenue analysis for banks. For more information, visit www.lodestonebanking.com.

Read the full article at http://omagdigital.com/article/MERGERS+OF+EQUALS+AND+OTHER+MISTAKES/2007195/258580/article.html.

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