Merger Tech Leveraging M&A’s Promise Requires a Responsive, Experienced Technology Partner
By Matthew Doffing
The number of community banks has fallen 54 percent over the past 25 years. As the consolidation trend continues in community banking, banks prepared to be buyers have compelling opportunities to grow through mergers and acquisitions. Banks prepared to capitalize on compelling M&A opportunities find that technology plays an integral part in their success. Gone are the days when technology was a tangential consideration for banks. Technology has become a critical part of banking – from operations to client facing tools, and even shaping culture and staff training and effectiveness. For mergers, which require the combination of two banks at every level, a well-managed and timely technology consolidation allows buyers to spend less, retain customers, bring staffs together, and ultimately enhance the ROI of the deal. To realize such benefits, however, requires a responsive and experienced technology partner. Community bankers point to UFS, a bank-owned data processor and digital banking company based in Grafton, Wis., as a game-changing partner that brings results to banks active in M&A.
When Opportunity Arises, Your Tech Partner Matters
McFarland State Bank learned firsthand of the centrality of technology and the importance of a strong partner when it acquired Evergreen State Bank in 2011 in an FDIC assisted transaction, said David Locke, CEO of the McFarland, Wis.,-based bank. In November 2010, the phone rang with a call from the FDIC: McFarland had won the bid for Evergreen. With the expectation of closing and converting the bank on January 28th, the bank’s leaders had two months — with Thanksgiving, Christmas and the New Year in between — to prepare. Unfortunately for McFarland, another wrinkle accompanied the FDIC transaction: “The problem was that when Evergreen failed, their contract with their current processor became void,” Locke said. “It became an open negotiation,” Locke added, “the processor wanted to charge us a ‘conversion fee’ that coincidentally looked a lot like a contract breakup fee. In essence they had the bank hostage. We needed to convert Evergreen as soon as possible for the benefit of our new customers, and because we were paying every day to run their system in addition to McFarland’s system with UFS.” UFS leaders engaged and used their knowledge of the data processing business to work with Evergreen’s processor on Mcfarland’s behalf, Locke said. “I doubt the partner we had before switching to UFS would have done what UFS did,” he said. “UFS is owned by community banks; they understand the business model and community bank challenges.” What initially looked like a nearly yearlong delay – a 12 month wait for conversion is common for other core processors – was expedited with UFS assistance. Once terms were settled, “UFS pushed us up to June 4 and came to meet us right away,” said Mike Moderski, McFarland’s chief financial officer.
Time is Money
For acquirers, the ability to close, and on the same day convert the target bank’s processing system to the acquiring bank’s system is of manifest importance. The old adage that time is money is as true for core processing as it is for banking in general. The longer a company runs duplicate technology the more costly and inefficient operations become. By moving conversion earlier, UFS saved McFarland thousands. In addition to paying for duplicate technology, it also had to pay for the inefficiency of running two systems. “We had to reconcile duplicate items every day, many transactions required another transaction, and the audits and double-checking that goes into that is doubled as well.” Moderski said. Moderski estimated that McFarland’s overtime costs doubled the annual average to $85,000 during the four month window of duplicate processing in 2011. “The staff was working 60 hours to 80 hours a week to deal with running the two systems,” he said. “Not everyone gets paid overtime, so those numbers don’t represent the soft costs. They also don’t capture additional costs for call reports, which took 50 percent more time, and other duplicated tasks. The hard costs are a fraction of the soft costs.” Leaders at McFarland celebrated the conversion as a turning point for the bank. “The elapsed time slowed the merging of our two cultures,” Moderski said. “Everything we do has a component of technology and is touched by UFS services. The new organization came into existence once the conversion was done. You do not actually have a combined bank until the technology is one and the same and you’ve all started to do things the same way. If we had to do it again, we would do it in a heartbeat and only with UFS’s help.”
On Beat With a Repeat Acquirer
For Nicolet National Bank, an organization that has engineered three full-bank acquisitions since 2013, successfully growing through M&A is about providing customers great service. To do so, management, staff and the culture of the two banks need to be combined as soon as possible, said Bob Atwell, the bank’s chairman and CEO. In order for the combination to occur, the technology conversion also needs to occur at the close of a merger, Atwell said. “It is really hard to integrate cultures and staff, and to serve customers well, if you are two banks on the back side but one bank at the front,” he said. “We want our teams singing off the same sheet of music. We are not trying to convert at close; we must convert at close.” Running two charters and two systems after the merger creates wide-reaching ripples of inefficiency, Atwell said. “It takes more resources, more people and it even affects asset and liability management,” he said. “It is hard enough to get a financial statement together for one bank where all the debits and credits flow. I do not know why you would want to do it any other way.” “While scale does matter to shareholders, they do not eat size,” Atwell continued. “They eat returns; that comes from serving communities well…it also is about what it costs to run your bits and bytes.”
From DeNovo to $2.3 Billion in 15 years
UFS has kept time with Nicolet to get the organizations singing the same song as soon as possible. Nicolet announced the acquisition of the $447 million Mid-Wisconsin Bank, Medford, Wis., in November 2012 when Nicolet was $728 million in assets. With UFS’s help, it successfully closed and converted Mid-Wisconsin five months later in April 2013. Then, with only a few months breather, in August 2013 Nicolet had the opportunity to buy the Bank of Wausau, Wis., which was closed by the FDIC. UFS was on time in a small window, converting the $43 million bank by October 2013. In September 2015, Nicolet announced its merger with the $1 billion Baylake Bank, Sturgeon Bay, Wis. Both Nicolet and Baylake were UFS customers. And, Baylake had already agreed in May 2015 to buy Union State Bank, Kewaunee, Wis. UFS and Baylake converted Union in December. Then, UFS and Nicolet turned around and converted Baylake by April 2016.
Taking Advantage of Industry Trends with Customer Centered Quality
Now, with nearly $2.3 billion in assets, Nicolet is significantly larger than when Atwell and Mike Daniels opened it in 2000 as Green Bay’s newest community bank. It now ranks in the top three Wisconsin based banks in assets. “We did not foresee when we started that the industry would develop such a wave of consolidation,” said Daniels, Nicolet’s president and COO. “We would not have said we’d have done five acquisitions by now. The environment changed. Now is a good season in the industry to acquire.” While a quick turnaround is important for banks like Nicolet, completing a quality conversion is no less important, said Mike Tenpas, UFS’s president and CEO. “We have talked to bankers who say they never want to do another conversion,” he said. The industry is full of horror stories, and poor quality data mapping during a conversion “is going to ruin your day,” said Kristi Hansen, vice president, operations at Nicolet. “I love conversions,” added Hansen, who has done four with UFS. “There is nothing more exhilarating and fulfilling than when everything comes together on conversion weekend. I wouldn’t love conversions in the same way without UFS. When I have something I do not understand about processing, online banking or something else I call UFS. I do not throw out the term strategic partner lightly. UFS is our strategic partner.” In addition to the extensive experience of its conversion team, UFS can draw on third party resources to flex up, said David Harrington, client relationship manager at UFS, and a selfproclaimed conversion nerd who has completed some 150 conversions. “We utilize specialized experts based on the project, even while the UFS team remains at the head of the project,” he said. “That flexibility and our experience plays into a shorter timeline.” An acquisition is an opportunity to get insight into other technology companies and reassess service providers, Hansen said. “We do not have a set answer for which provider we will choose,” she said. “Even though we have acquired five banks and assessed our providers numerous times, we have stayed with UFS. Cost-wise, they are very competitive. We also stay because of their service.”
Responsiveness Brought Results for Anstaff Bank
Opportunity does not wait on bank technology providers. A technology partner that can complete a quality conversion on a tight timeline can be an important factor for certain acquisition opportunities. In a branch transaction, the data processing for the acquired branch is required to be converted to the acquirer’s system at closing because, unlike a full-bank acquisition, a branch does not have its own processing system. For $437 Million Anstaff Bank, N.A., which purchased a branch location and deposit relationships from the bank now known as Bear State Bank in 2013, the conversion timeline allowed the Green Forest, Arkansas-based bank to win the deal. “The seller approached us and wanted to close within 90 to 120 days,” said Byron Russ, Carrol County Market President and Chief Operating Officer overseeing technology. “We were concerned that if we couldn’t meet Bear State Bank’s timeline that they would go to another buyer,” Russ continued. “UFS really accommodated our timeframe; it did not even cause a hiccup. We closed and converted on the same day. UFS’s team makes it work so well.” “The conversion went smoothly and we were able to maintain all of the large commercial clients through the acquisition and conversion,” Russ said. “What’s more, we rolled out our mobile banking product to all the customers of that branch on day one.” Russ joined Anstaff Bank in 1976 and has watched technology become more and more a part of the bank since it got its first IBM PC in 1986. Having an unresponsive technology partner can be very much like going back to 1976, he said. “If I had to go back to 1976 technology, I would retire,” he said. “I just could not do it; not with the number of people we have and customers’ expectations today.”
Partnering for Efficiency When Circumstances Prevent Expedited Conversions
Anstaff Bank also has a conversion coming in March 2017 to consummate its acquisition of Twin Lakes Community Bank, Flippin, Ark. Anstaff purchased Twin Lakes at the end of 2015 but has intentionally delayed conversion, maintaining it under the holding company as a separate charter for tax reasons. Anstaff’s circumstances are just one of many reasons a bank would choose not to convert at close. When that situation occurs, UFS can still help smooth the way for a better experience for customers, said Stacy Pritzl, UFS’s vice president of customer relations. “Technology is at the center of everything a bank does,” Pritzl added. “The customer and employee experiences are both affected and connected to technology. It is really hard, even impossible, for the customers of the acquired bank not to notice. There a number of ways to assist a bank behind the scenes from temporary interfaces, process changes, and enhanced training,” Pritzl said. “By engaging with our team and tools to do intensive training early in the project, employees build confidence with technology and rethink their processes. The end result is enhanced creativity, collaboration, and expedited changes to the culture that management is often seeking as part of a technology conversion.” With 4.52 assets per employee – compared to an average of 3.75 assets per employee for Arkansas banks – Anstaff leaders are very pleased with the bank’s efficiency. “We get more done with less people. Our above average numbers for efficiency are partially attributable to our UFS relationship,” Russ said.
Whitewater Bancorp Focuses on Customer Retention
After Whitewater Bancorp., Inc., purchased Palmyra Bank, Palmyra, Wis., some 30 years ago, the company chose to maintain its independent charter as a way to stay connected to the community. However, as the industry changed and technology became more important to customers, the separate charters became a detriment. In 2015, Whitewater decided to merge the Palmyra bank into its other charter, First Citizens State Bank, Whitewater, Wis. The merger offered cost savings and efficiency gains. It also offered the company the opportunity to deepen relationships with Palmyra customers by bringing First Citizens’ mobile deposit, bill pay, remote deposit capture, and secondary mortgage lending to Palmyra customers. For all the potential benefits of the merger, management also saw a significant risk that customer relationships would be disrupted by the conversion. “The whole idea behind keeping the charters separate was that the Palmyra Bank was that town’s bank. It was about keeping customer relationships. The goal of a conversion is account retention because people get upset when things aren’t working; that is when they think about leaving,” said Nate Parrish, executive vice president at the $240 million First Citizens. Even though the $40 million bank was a relatively small merger for First Citizens, there are thousands of unintended consequences that can occur, said Parrish. “The UFS team was critical in guiding us through this. They had a checklist for us with the conversion all mapped out in terms of timeline and steps that needed to get done. They knew the pluses and minuses to different routes; that really helped us a lot.” The consultative leadership and experience minimized customer impact throughout the six month project, which was completed in February 2016. “A seasoned partner is key to a successful conversion.” Parrish said, who will take over the CEO position when the bank’s current CEO, Jim Caldwell, retires. Parrish, who also is a lender, said that despite the complexity of the project, we were still able to focus on serving customers while working on the conversion. “UFS has made it easier for us to be focused on what makes us money,” Parrish said. “Our team really see UFS as a partner. It is a benefit to work with them. When we have a problem, we know who to turn to. If we didn’t have UFS helping us, I do not know that [the conversion would even] have happened within nine months of closing,” Parrish asserted. At the end of the day, consolidation was perceived as a benefit for both the organization, and its customers.
Conversions Likely to Remain a Business Imperative
UFS CEO Mike Tenpas sees a busy future for his conversion experts. “Bank consolidation will continue, and with an organization and technology purpose-built for community banks, we will bring the collaborative leadership our clients need to successfully execute on their growth plans,” Tenpas said. A responsive and experienced technology partner, UFS clients said, is imperative to capturing opportunities, particularly in M&A.
Matthew Doffing is editor of NorthWestern Financial Review, a trade journal serving community banks in the Upper Midwest. UFS partnered with Doffing independently to create this case study.