When it comes to growth strategies, one school of thought is, “The quickest way to get volume is to buy it.” With last year’s surge in merger and acquisition (M&A) activity and this year’s activity heating up, banks seem to be taking this strategy to heart.
2021 was a banner year for bank M&A, with 210 announced transactions as of December 31 — an 89% increase from the prior year’s 111 deals. Additionally, the total 2021 disclosed deal value of $77.6 billion exceeded 2019’s next-highest total deal value of $54.8 billion. Bank Director’s recent M&A survey found the larger the bank, the more likely it is to be an active acquirer, with 56% of banks holding more than $10 billion in assets signaling their intent to acquire another institution this year.
However, M&A can be tricky when it comes to integrating systems and staff. A study from the Harvard Business Review found between 70 and 90 percent of acquisitions fail, with integration issues being a key cause. For banks on both sides of the acquisition, this unwanted issue can be avoided, in part, by including managed services in their M&A strategy.
A managed services model enables businesses to shift more complex or time-consuming aspects of their operations to an experienced third party so that they can focus their attention on other areas or issues, such as an impending merger or acquisition. This type of operating model also enables businesses to shift from a high, fixed cost structure to a lower, variable one that matches the ebbs and flows of volume. This cost structure can help make balance sheets even more attractive to potential buyers or free up needed capital to finance a potential M&A deal.
While most banks won’t immediately think of managed mortgage services as a play in the M&A game plan, mortgage is actually an ideal candidate for deploying a managed services model due to its levels of complexity, compliance risk and volatility. It is already a massive undertaking to inject mortgage operations into an institution where they did not previously exist; however, merging two mortgage operations into a cohesive unit only increases the difficulty of successfully completing the merger or acquisition.
Post-acquisition, having managed mortgage services eliminates a significant source of potential friction because it reduces the number of staff to be absorbed, repurposed or who may become redundant, and streamlines the technology and operational integration processes. If the acquired institution has an existing mortgage division, those operations can easily be phased out in favor of a combined division such as one powered by Promontory MortgagePath’s managed fulfillment services, or Promontory MortgagePath can simply augment the acquired institution’s existing structure. In either scenario, managed mortgage services enable the acquiring bank to focus on integrating other less complex areas and lines of business, thus increasing the chances of post-acquisition success.
Converting mortgage operations to a managed services model can be a solution to add franchise value regardless of a bank’s growth strategy. Additionally, moving to a managed services model using a technology-enabled partner allows banks to justify and introduce digital platforms consistent with their growth strategy and add value while minimizing disruption to existing operations and mitigating system integration issues.
Offering mortgage products helps banks find scale to drive technology or other investments, expand their geography, acquire new customers and grow revenue to advance each of those goals. By partnering with a managed mortgage fulfillment services provider to continue offering this foundational financial product in a more cost-effective manner, banks can more easily advance their growth goals while eliminating what could be a significant source of potential M&A friction in the process.
For the acquisition-minded bank, portable, more-efficient mortgage operations not only enable these banks to move nimbly through the M&A landscape by providing the flexibility to easily incorporate the acquired bank’s mortgage business but also to expand their product offerings. In today’s margin-compressed environment, mortgage growth can be a key revenue driver that ultimately helps fund a bank’s acquisition plans.
By using a technology-forward fulfillment solution, such as the one offered by Promontory MortgagePath, banks have added flexibility, while being insulated from the mortgage market’s ebbs and flows. Promontory MortgagePath offers banks a variable cost structure for their mortgage business by bundling the necessary parts of mortgage origination such as point of sale and loan origination system technologies, and loan origination assistance, set-up, processing, underwriting, quality assurance, closing, post-closing, compliance, servicing transfers functions and investor delivery services into a single service offering.
To learn more about how Promontory MortgagePath’s fulfillment solution can help set your organization up for M&A success, contact us.