MERGING BANKS &

MERGING CULTURES L.T. (Tom) HALLPresident & CEOResurgent Performance, Inc.Alpharetta, GA

1

Texas Bankers Association2015 Human Resources and Operations

Conference – Austin, TXAugust 19, 2015

WHAT IS CORPORATE CULTURE?

It’s the mission, values, attitudes, beliefs, standards, and type of people that comprise your bank.

Your culture is your foundation.

2

CULTURE IS WHAT GOES ON WHEN THE MANAGERS ARE NOT AROUND.

GREAT CULTURES LIVE AND BREATHE ACCOUNTABILITY.

3

CULTURE IS MORE IMPORTANT TO THE BANKING INDUSTRY THAN EVER

BEFORE. Troubles of the Great Recession are mostly over,

but a new banking model is emerging

The number and value of bank mergers are rising, but not at the meteoric pace that some had predicted in 2010

NEW focus areas: Culture, Growth and Changing Customer Preferences

The changing industry is requiring banks to have a solid culture adaptive to continuous improvement

Weak Culture = Failure

4

*Deloitte M&A Institute “2015 Banking M&A Outlook”

2000-2014 M&A Activity:

5

36

27 27

2012 2013 2014

2012-2014 Open Bank Acquisitions: Texas

SO FAR IN 2015, TEXAS

HAS EXPERIENCED

EIGHT COMMUNITY

BANK

ACQUISITIONS.

TEXAS OPEN BANK ACQUISTIONS

6

7

OPERATING FINANCIALS IN TEXAS, AS WELL AS INDUSTRY

TRENDS, SUGGEST MORE CONSOLIDATION

IS HIGHLY LIKELY

A PERSPECTIVE ON THE CURRENT FINANCIAL PERFORMANCE

OF TEXAS BANKS IS HELPFUL.

Q2 2015 Texas Performance Summary Provided by Bank Trends / Spotlight Financial

On a pretax ROA basis, 97% of Texas

banks were profitable in the second-

quarter of 2015

• For the 492 Texas-chartered banks, median Pretax ROA was 1.17% in Q2

• Median Pretax ROE was 11.23% during the quarter and median Net Interest Margin was 3.6%

• Year-over-year median loan balances increased 8.9%; median Loans-to-Deposits ratio was 65%

• Median Noncurrent Loans ratio was 0.37%

• Median Noninterest Income to Earning Assets was 0.62%; median Noninterest Expense to Earning Assets was 3.0%

9

HIGH PERFORMANCE ENABLES AND FACILITATES:

• Independence from potential acquisition

• Creates a model for future organic and/or strategic growth

• Drives greater share value and solid mergers/combinations

• BEST in BREED Culture

10

LIVE OAK BANKWILMINGTON, NC670M NICHE: SPECIALTY LENDING

HIGHLIGHTING A SPOT-ON CULTURE:

• #1 On American Banker’s “Best Banks to Work For” List

• Very Strong Financials

• Accountability is Key

• Strong emphasis on employee appreciation and empowerment

• Executives are totally transparent about bank performance

WHAT ABOUT

MERGING TWO

DIFFERENT

CULTURES?

11

• Most research indicates that M&A activity has an overall success rate of about 50%—basically a coin toss.

• In surveys conducted in recent years, the percentage of companies that failed to achieve the goals of the merger reached 83 percent.

• According to Gallup, there is an 8% average customer attrition rate for banks post acquisition. It can be even higher.

Without Cultural Compatibility And Strength, These are

REAL Risks. 12

MERGING CULTURES: THE GOOD, THE BAD, & THE UGLY

Failure to Realize Anticipated Benefits:

Cost savings not realized Marketing / Sales synergies missed New processes, policies and procedures not integrated Asset quality diminished New technologies sub-optimized Culture and work environment weakened

13

MERGING CULTURES: THE GOOD, THE BAD, & THE UGLY

Failure to Realize Anticipated Benefits, Continued:

• Human resource potential not realized• Compliance and risk management approaches differ

greatly• “Us versus Them” scenario develops • Key people from both sides leave • Customer frustration and concern reduces engagement• Other on-going projects and initiatives slow progress

14

Managing Cultural and Functional Integration Effectively:

• Everyone understands their new roles and goals• It feels more like a partnership than an acquisition• Best-in-Breed practices and processes are adapted across the

organization • A sense of new or re-invigorated Purpose and Vision• Communication exceeds everyone’s expectations, including

customers • 1+1 can equal 3…. Unthought-of synergies are found

15

MERGING CULTURES: THE GOOD, THE BAD, & THE UGLY

Managing Cultural and Functional Integration Effectively, Continued:

• Economic benefits realized - a more profitable bank is a better employer• New products developed or better marketed across the new organization• A model for future organic and strategic growth is enhanced• Everyone will not be happy, but the Greater Good is satisfied• Duplicative tasks and functions are reduced• Greater focus on the customer realized • In time, “acquired employees” understand changes

`13

MERGING CULTURES: THE GOOD, THE BAD, & THE UGLY

RESEARCH, PATIENCE, PREPAREDNESS, AND AN

OPEN MIND ARE KEY TO INTEGRATING TWO

CULTURES. ANOTHER KEY: THE HR DEPARTMENT

• M&A transactions are often led by individuals with strong financial sense.

• Frequently, the “soft side” of M&A is disregarded.

• HR is essential in navigating the looming cultural differences.

17

DO YOUR DUE DILIGENCE

• Organizational Structure• Compensation• Employee Attitude• Review Process• Measurement of Results• Way of Thinking• Decision Making• Customer Service• Accountabilities / Metrics

18

ALONG WITH IN-DEPTH RESEARCH OF FINANCIALS, MARKETS, PROCESSES,

PRODUCTS, ETC., THERE MUST BE A THOROUGH REVIEW OF THE CULTURE:

What are the over arching cultural themes of the bank to be acquired and

how do they align with your culture?

ALWAYS BE OPEN TO THE

POSSIBILITY THAT THE BANKS MAY

BE TOO

CULTURALLY DIFFERENT TO

SUCCESSFULLY MERGE.

No acquisition is better than a bad acquisition.

19

TAKE THE BEST FROM BOTH SIDES

Whether it’s organizational structure, compensation methods, employee review methodology, or anything else, always be willing to bring in the best practices from BOTH banks. Everyone gets a shot at CHANGE.

20

PREPARE EMPLOYEES FOR CHANGE

• Many months before the merger goes live, the conversation needs to begin

• Communication is key to developing trust and rallying employees around the change

• Give your employees a forum to ask questions

• Let them know early on how their role/department/compensation will change

• Continually foster an “US” mentality and not an “Us Vs. Them” mentality

• ALWAYS be positive

FEAR OF THE UNKNOWN CREATES DISTRUST AND UNHAPPINESS

21

START THE INTRODUCTIONS

EARLY

CREATING A COHESIVE CULTURE STARTS WITH

CREATING ONE TEAM.

Whether it be lunch meetings, training sessions, or kickoff events, let employees from the separate banks get to know each other early on.

22

EMPLOYEE DISENGAGEMENT IS A

KEY SIGN OF POST-MERGER

DYSFUNCTION.

KEEP THEM ENGAGED AND IN THE LOOP.

23

CREATE A TRANSITION TEAM

• Continually communicate changes/updates/information to employees pre, during, and post merger

• Rally employees around change

• Put together, with help of executive team, a thorough merger checklist and timeline

• Ensure checklist is executed

Pick a group of experienced employees with positive attitudes from all

different areas of both banks to:

24

Because Cultures Are Quirky…

Cultures can be sub-optimized with illogical , inconsistent decision making.

• Don’t assume consistency• Use confidential employee questionnaires and interviews to

identify issues

Some cultures are dominated by compliance, credit, administration or risk management; others by sales or finance.

• Your due diligence team should understand the prevailing cultural aspects and how that impacts integration into the surviving culture and bank

Cultures vary in terms of how they treat customers relative to pricing, relationship management, exceptions handling, etc.

• Integration teams must be prepared to address these on Day 1

25

POST MERGER AND INTEGRATION

• Excessive number of similar vendors• No staff and management performance expectations• Redundant and non-value adding functions• Low morale and contribution – pervasive or limited• Duplicative ancillary systems• Unclear goals and mission• Excessive controls and unwarranted administrative burden • Diminished pipeline of new business, sales, and marketing• Integration of the core system with inconsistencies• Customers failing to understand the benefits of the bank combination

26

Sample of Unfavorable Merger / Culture Integration

Outcomes:

THE PRESCRIPTION:

27

Whether you plan on acquiring, being acquired, or

remaining independent, your bank can benefit from an

Cultural - Organizational Assessment by:

• Going into a deal with your eyes wide open

• Addressing your shortcomings relative to best practices and high

performance earlier in the cycle

• Helping Management to focus on the critical areas of vulnerability,

regulator focus, and risks

• Understanding leadership and communication improvement

opportunities

• Identifying under-utilized talent and organizational potential

QUESTIONS?

L.T. (TOM) HALLCEO Resurgent Performance, Inc. 770-664-9239 LTHall@ResurgentPerformance.com

www.ResurgentPerformance.com28