MARK FORMICA
Managing management

When two banks merge, it is easy to see when the conversion is complete – there are new signs, new slogans and sometimes new bank employees – but what goes on behind the scenes during a conversion can determine whether the merger actually is successful.

Mergers and acquisitions have become common in the banking industry, but still have a stigma attached because customers can experience problems with their accounts or feel they are no longer banking with a small or local institution. While banks can’t stop a customer from feeling a certain way about a bank merger, bank executives say they do strive to make the transition as smooth as possible.

Companies like COCC, a Connecticut-based firm that provides technology-related services to banks, work with financial institutions during the conversion process to smooth out the integration of disparate computer systems, databases and technology. Most, if not all, of the training and preparation are done in the six to nine months leading up to the actual conversion weekend.

In the first few weeks after a merger announcement is made to the public, COCC will “scrub” the data files of both banks to prepare customer accounts for the merger process. According to COCC spokesman Robert Bessel, bankers review each account to assure it is coded properly. The process involves a review of the operating systems at both banks as the first step in facilitating the merger process.

In the three to six months before the actual conversion, notification of the proposed merger is sent to vendors, the Federal Reserve and regulatory agencies. Meanwhile, a “kickoff” meeting is held to explain the process to bank employees

Another aspect of assuring a smooth transition is training the bank team.

“The teller system is going to look and feel different,” said Marco Bernasconi, assistant vice president of customer services at COCC.

At Maine-based Banknorth, which most recently acquired Foxborough Savings Bank, teams are set up to convert different systems.

“We talk about the major tasks that have to be completed,” said Joseph W. Hanson, executive vice president of operations at Banknorth.

For example, a team will be created to assure the loan servicing department of the acquired bank and the acquiring bank are matched. Mortgage loans will have to be converted and a “discovery analysis” occurs in order to map the banks’ products.

Finally, two weeks before the actual conversion weekend, a mock conversion is done.

“It’s sort of a dress rehearsal,” said Hanson.

According to COCC, on the weekend when the conversion actually occurs, live data is converted on the Saturday of a conversion and on Sunday the staff inputs account information into the newly converted systems and an offline, or backup, file is generated.

Citizens Financial Group, which has participated in 26 conversions in 14 years, follows a similar conversion pattern, like developing a game plan to migrate customers to a new system. However, the bank has its own philosophy regarding conversions, in general.

Mark Formica, vice chairman of Citizens Financial Group, said the bank does not view the conversion as the single event of a merger. The conversion, he said, is one piece of an entire integration that involves corporate culture, branding and business processes.

Hanson said Banknorth has reached a point where conversions generally run smoothly and there are few, if any, mistakes made when mapping products. However, he concedes that conversions are not perfect.

“People do not like change,” said Hanson. “Conversions are disruptive [to customers].”

Banknorth sets up a specific phone number during an acquisition or merger that serves as a hotline to deal with customer questions.

Citizens Bank also tries to makes a good impression with the management of the bank being acquired.

“If you treat the management well,” said Formica. “They’ll tend to convey that to their customers.”

Maps and Road Bumps

Despite a bank’s best intention to conduct a problem-free conversion, there inevitably numerous issues that can arise. Bessel notes that merging banks review their product sets and decide to drop, merge or maintain certain products. However, each of these actions can lead to problems.

Dropping products, Bessel said, almost always offends customers. The bank accounts for this in their runoff rate, but the figure can be miscalculated either positively or negatively.

Merging products can create dissatisfied customers because the product may lose certain features that caused a customer to select it in the first place.

And keeping products can create competition within the merged entity not much different than the kind of competition that existed before the merger, which can ultimately confuse customers and weaken the bank’s identity as a franchise.

Hanson said banks can’t always grandfather in an acquired bank’s products, so customers can become dissatisfied, something that is always a concern for bank executives.

“That’s been a big source of [problems],” said Hanson. “When you read about conversions being disasters, oftentimes that is what happened. [One example is] if fees are higher [at the acquiring bank], you’re going to get a fair amount of backlash.”

Banknorth attempts to ameliorate this by doing such things as waiving fees in the first month following a merger product conversion.

There also can be complex regulatory issues with which a bank must deal during a conversion process in which a bank is doing business in a multiple states. Bessel said some banks discovered that they were using one state’s new account forms for the other states. Other compliance issues can include improper loan billing, interest calculations and fee assessment.

Formica said years ago one major problem banks would experience during a merger was not having enough computer capacity, but such difficulties are infrequent today.

As banks become more familiar with mergers, the process becomes a little easier, most banking insiders agree. Formica notes that Citizens has recently discovered another aspect to appease customers during a merger.

During the upcoming Citizens Bank and Charter One Financial merger, Formica said, customers will not see their account numbers change. This will be Citizens’ first conversion that will retain existing account numbers.

A merger can also uncover things gone awry. Bessel said that audits conducted through the conversion process have uncovered embezzlement schemes. Banks also routinely find that legitimate service charges are not being assessed, which can yield a positive cash flow for the bank following the merger, Bessel said.

Because not all customers will stick around during a merger, banks usually factor in a loss. According to Mark Shaw, first vice president of customer service for COCC, banks generally lose between three percent and six percent of their combined deposit base during a merger.

Hanson said the biggest cost to a bank during a merger is the lost of customers.

However, Formica said Citizens no longer factors in a loss of deposits. He said the bank’s last 10 merger transactions have resulted in a growth in deposits.

While it may be expected that larger banks would have more work to do during a conversion, Hanson disputes that. He said smaller banks have to follow plans similar to those adopted by larger banks, even though smaller customer bases and loan portfolios may be involved.

Rockland Trust, which recently acquired Falmouth Bank, compiles a project plan and assures systems and products are mapped appropriately. Pamela O’Leary, senior vice president of Information Services at Rockland Trust, said employee training also takes place during an acquisition.

For the Falmouth Bank acquisition, O’Leary said there were between 75 and 100 people on the Rockland Trust side involved in orchestrating the conversion process.

Similar to a larger bank such as Banknorth, Rockland Trust focuses a lot of energy on assuring products are mapped appropriately. The aspects of accounts that a customer would notice are also tested and retested, O’Leary said.

For publicly traded banks, pleasing the customer is a priority, as is pleasing shareholders. Shaw notes that the link between customers and shareholders is significant because if there is a loss in a bank’s customer base, there is an accompanying loss in revenue, a result of which shareholders certainly take note.

There are other costs, as well. Richard P. Chapman Jr., chairman, president and chief executive officer of Brookline Bancorp, which has announced it will acquire Mystic Financial, said banks also must look at the costs to terminate contracts with vendors.

“It [a merger] is an expensive proposition,” said Hanson.