These days, all kinds of interesting happenings are taking place in the banking world. Close to home, Maine Community Bank and Gorham Savings Bank recently announced they’ve “entered into a definitive agreement to merge under the Maine Community Bank name.” The merger will create the second largest mutual savings bank in the State of Maine, with almost $2.7 billion in assets.

Both banks boast a rich history in the community: Maine Community Bank’s heritage dates all the way back to 1867, while Gorham Savings Bank was founded in 1868.

I merge banks for a living, so I’ve got a few thoughts on the merger. In this thought-provoking article, I’m sharing the 9 top risk areas I believe should be considered.

The Hunt is On…for Deposits & Profits

The quick acceleration to higher interest rates has caused a deposit flight into higher and safer yielding assets, such as US Treasuries. The result? Tremendous stress on bank balance sheets – and this stress shows up fast in bank liquidity.

Having sufficient deposits is crucial for day-to-day operations, as is having a liquidity position to lend and meet any unexpected funding needs. In other words, banks simply cannot operate without sufficient deposits. The Silicon Valley Bank failure is an extreme example of what happens when deposits fly away.

Why Mergers Are a Fast Path to Boost Bank Deposits & Decrease Expenses

What’s the quickest way to increase deposits and lower expenses? Mergers.

When mergers go as promised, the combined deposits and assets create a larger and more stable financial base. The new merged bank reduces expenses with shared resources, infrastructure, and technology, thus reducing overall operating costs.

Typically, customers get to enjoy more options, better products, and services. A win-win scenario, right?

Merging banks is like mating elephants – it’s fun to watch…just don’t get too close.

9 Top Risk Areas for Gorham Savings Bank & Maine Community Bank

I merge banks for a living, so I know from experience that it is a dangerous move for executive careers and reputations, institutional survival, and stockholder values.

Here are my top risk areas Gorham Savings Bank & Maine Community Bank must consider:

1. Cultural Differences: “We are all Mainers.” Yes, but…institutions have different cultures. Merging different organizational cultures and aligning these cultures can present a challenge. If the cultural integration is mishandled, it can lead to employee dissatisfaction, reduced morale, and difficulties in collaboration. Cultural differences are corrosive and will guarantee failure.
2. Integration Challenges: GSB & MCB have small operational technology teams. There is no institutional integration experience. This is a great risk. That’s because the process of integrating systems, processes, and technologies can be complex and time-consuming. Technical difficulties in merging IT systems may lead to disruptions in customer service and operational inefficiencies. Adding third party experts and consultants to reduce integration risks will increase the risks of cultural differences. I’ve seen tech teams sabotage each other over cultural differences.
3. Customer Disruption: Changes in branding, account numbers, and services can cause confusion and frustration among customers, resulting in a poor experience. If communication is not managed effectively, there’s a risk of customer attrition or dissatisfaction. Marketing and communications are your disaster recovery teams.
4. Talent Loss: Key employees may decide to leave the organization during or after a merger due to uncertainty, changes in leadership, or dissatisfaction with the new organizational structure. Losing key talent can impact the effectiveness of the merged entity. Sorry my executive friends, this is not you. These are the working folks who really know how the bank operates every day. Every merger I’ve done has a dozen key people, who if they left, the merger might fail. Who are your key people?
5. Credit Risks: Merging banks may have different risk profiles. Assessing and managing credit risks in the combined portfolio can be complex. A poorly managed credit risk integration could result in increased loan losses. Buyer remorse is common especially in credit risk. GSB and MCB view risk very differently in all kinds of fun stuff, such as: commercial lending practices, AML safeguards, Reg O tolerances and many more.
6. Operational Risks: Merging banks must ensure a smooth transition in day-to-day operations. Operational disruptions, whether in branches or back-office functions, can lead to service interruptions and customer dissatisfaction. And obviously…loss of customers is a big deal. The whole reason for the merger is to combine deposits and assets.
7. Regulatory Hurdles: Mergers in the banking industry often face regulatory scrutiny. Delays or denials from regulatory authorities can impact the planned timeline for the merger and increase uncertainty. Just down the road, our friends at TD Bank had a very expensive stop to their First Horizon Bank merger due to regulatory concerns. Even small banks experience some regulatory pressures.
8. Financial Performance: Merging banks may face challenges in achieving the anticipated financial benefits, such as cost savings and revenue synergies. Failure to realize these benefits can affect the overall financial performance of the merged entity. Just some examples include:

• • inability to close branches due to community concerns
  • higher employee termination costs
  • higher new employee costs
  • lawsuits…and many more

Sun Bank & BB&T combined to create Truist in 2019 and still have not met their financial performance goals.

9. Cost Overruns: Mergers often involve significant costs related to integration, including technology upgrades, rebranding, and employee restructuring. If these costs exceed initial estimates, it can impact the financial viability of the merged entity.

Gilman Patrick LLC, located in Westbrook Maine, performs mergers, conversions and transformations from Hawaii to New England. Got questions? Schedule a call today with Banking Technology Consultant Patrick Martin.

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