How to avoid a culture clash post-merger

A merger or acquisition is a complicated affair—and organizational change can be one of the most challenging aspects. But when it comes to corporate culture, there doesn’t have to be a clash. Here, community bankers who’ve been through it offer their words of advice.

By Kelly Pike

When it comes to community bank mergers and acquisitions, success isn’t just in the numbers. It’s also in a successful combination of cultures. Whether it’s a strong bank acquiring a weaker bank, a large bank acquiring a smaller bank or a merger of equals, there’s no shortcut to creating a harmonious institution. Creating a unified culture is all about knowledge and communication.

“The reality of every merger is change,” says Peter Weinstock, partner at Hunton Andrews Kurth LLP. “A lot of times, banks buy banks without articulating what the game plan is to the people who are then trying to accomplish that game plan.”

“Some were pushed out of their comfort zones, but in many cases, we ended up with bigger, stronger, better departments with a lot
of depth.”

—Mike Robbins,
Cornerstone Ban

Ideally, you’ll have a good feel for a bank’s culture before the deal is done. Progress Bank in Huntsville, Ala., aimed to keep things simple when it acquired a smaller Birmingham, Ala., bank last year to become a $1 billion-asset bank. Having already built a relationship with the other bank’s leadership, Progress Bank knew the institutions shared a similar business model focused on commercial banking, wealth management and mortgage banking, as well as a culture of open communication.

“The things they did well, we did well, too,” says David Nast, president and CEO of Progress Bank. “We didn’t have to go into the organization and learn something new.”

While banks don’t need to take the same approach to everything to mesh well, it’s essential that leaders understand the implications of the differences. This is especially true when the acquisition is being made to achieve specific goals.

“What happens a lot of the time is that the target is a mortgage lender and not much of a commercial lender,” says Weinstock. “It’s acquired by a commercial lending bank to round out and diversify its portfolio. [Then,] the acquirer doesn’t understand why it can’t grow commercial lending. [It’s because] they didn’t hire anyone who did that.”

Avoiding conflict
It’s not just business models that create cultural conflict. Organizational direction can also create challenges, particularly when one bank prioritizes employee autonomy and decision-making, and the other uses a top-down, command-and-control structure. An employee accustomed to having the authority to waive fees will quickly get frustrated if she feels like she isn’t trusted to take care of the customer, notes Greyson E. Tuck, attorney and consultant with Gerrish Smith Tuck Consultants and Attorneys PC in Memphis, Tenn.

“Explain what your culture is and why it is the way it is,” Tuck says. “You have to tell them, ‘We don’t waive overdraft, because we don’t think it’s appropriate to extend credit when we’re not compensated for doing so.’ The employee may disagree with the thought, but at least they understand the reasoning.”

The worst thing you can do is stifle employees’ voices, because they can help the bank learn where the sticking points are, says Mollie Carter. She’s chairman, CEO and president of $4 billion-asset Sunflower Bank in Denver, which merged with a $2 billion-asset bank last year. For example, a conversation about integration, conversion and mapping products revealed exceptions from both organizations that made it harder to serve customers, because it increased the potential for error. Employees came to understand that when customers are treated the same and placed with the correct product or service, then anyone in the bank could serve them.

“That helps you formulate plans and really define the culture of the merged organization, as opposed to deciding that the culture of one legacy organization is going to be the one that prevails,” says Carter. She found such exercises especially helpful since one of the banks was made up of three organizations that weren’t fully integrated.

An area that can be especially tricky is blending boards, particularly when two strong, similarly sized institutions come together. Cornerstone Bank in Worcester, Mass., formed in 2017 when two mutual $550 million-asset banks merged. Each 150-year-old bank had to get board approval for the merger and then reduce members to keep the combined board at a functional size. “Some were second-generation legacy seats, but we worked through it,” says Mike Robbins, chairman and CEO. “Everyone made good decisions about the best interest of the bank.”

At Sunflower Bank, choosing members of the leadership team wasn’t about sides. It was about fit. “In M&A, you want to end up with the best possible leadership team to go forward with the business,” Carter says. “It can’t just be win-lose.”

Common pitfalls
Communication about culture from the executive level is usually strong, notes Weinstock, but the message often gets lost as it filters down through the organization. The way to avoid this is to build an integration plan for achieving the bank’s objectives by using small, focused committees with key people from each bank.

Regulatory issues are a key area of focus during and after a merger, so, for example, these committees could address everything from remediating Bank Secrecy Act high-risk customers to applying treasury management products and services to customers.

“The beauty of the bank deal is that unlike any other deal, you tend to sometimes have three to six months to get through regulatory issues,” Weinstock notes. “That’s time to plan for closing and post-closing before you get there so you have a running start.”

At Progress Bank, its larger geographic footprint made it harder to communicate, but the bank did not allow that to slow down its decision process. The bank implemented a task force to streamline the credit process from application to close, and gave decision-making authority to its Birmingham and Florida panhandle markets, Nast says

Eight ways to avoid culture clash

  • Understand your own culture and find a bank with a similar one. The transition will be easier.
  • Be honest about intentions. Don’t pretend it’s a merger of equals if one bank is expecting to be the leader. It’s a quick way to lose trust.
  • Be upfront about expectations at every step. If people don’t know the game plan, staff won’t know how to support it.
  • Communicate. People are uncomfortable with change. Beat the rumor mill by keeping employees aware of relevant developments.
  • Have a plan to implement changes at all levels. Executive leadership isn’t enough. The amount of detail involved requires cooperation and communication from everyone.
  • Explain what the bank’s culture is and why it is the way it is. It’s harder to be mad about something when you understand the reason.
  • It’s not always effective to take the best of both cultures. It can create confusion when everyone is asked to change.
  • Let employees know where they stand. Reassure them if they still have jobs by creating a job description and employment path.

And while the two banks that created Cornerstone Bank had overlapping lines of business, one did significantly more commercial lending, while the other was more retail-oriented. When deciding on leadership, Cornerstone decided to have the commercial-heavy bank lead commercial loan activity and the retail bank lead retail, Robbins notes. It also hired a new chief financial officer.

Lending philosophy is another big hang-up—one that can frustrate loan officers and cause them to abandon ship, Tuck says. That includes approaches to everything from interest-rate risk and collateral to the speed of loan approvals. It’s especially true when smaller banks that are used to less-formal lending processes and character loans are absorbed by a larger, more formal bank.

Sales culture can also differ. “If the target bank is used to being order-takers waiting for business to come in, and the acquirer has an incentive-driven sales culture, then it may be problematic to try to get people at the target bank to change their stripes,” Weinstock says.

Boosting morale
Sunflower Bank successfully emphasized to its staff how both banks were similar, including in the areas of customer focus and accountability. They also justified decisions by explaining that “the business had to win,” meaning decisions had to be made for the benefit of the whole $4 billion-asset bank and not just one area.

“Overall, it’s just about being in front of people—being visible and being clear that even when we’re making changes, it doesn’t necessarily mean any organization was wrong for how they did it before,” Carter says.

Meanwhile, worries about layoffs can deflate morale. Whether a bank is keeping every staff member or laying off a segment of the acquired bank’s employees, it’s important to be upfront about what role each employee will play at the new bank.

A written job description that tells employees what their involvement and objectives will be, and where they fit on an organizational chart, can go a long way in making employees feel comfortable, Weinstock notes.

“The approach generally is that if we give them enough money, they’ll be happy,” he says. “Really, the answer is engagement and communication. Having people feel like their ideas are valued is much more important to keeping people and having people feel like they are part of the acquirer—even though [they] came from the target.”

Cornerstone Bank promised everyone a job, although sometimes in a slightly different role or reporting to a different person. “Some were pushed out of their comfort zones, but in many cases, we ended up with bigger, stronger, better departments with a lot of depth,” Robbins says.

Even changing a dress code from polo shirts to suits and ties sends a message, Tuck notes. “Are you communicating why that’s important? If you can’t articulate it, are you open to changing it?”

In the end, it all comes down to being open and honest. “I’m a strong proponent of being forthright—communicating as much as possible early in [the] process, but not trying to communicate things that aren’t appropriate across the organization and aren’t fully formed,” Carter says.

With clearly defined expectations, a solid guidepost for execution and open communication, the result can be a stronger institution, says Robbins: “We started off in good places and ended up in an even better one.”

Merger master

After acquiring nine failing banks between 2008 and 2012, including in Florida and Georgia, Stearns Bank in St. Cloud, Minn., has become an expert at merging cultures. The $2 billion-asset community bank relies heavily on The Style of Stearns, a one-page document that communicates the bank’s culture, which includes strong credit and oversight, and an emphasis on safety, soundness and efficiency, says chief risk officer Harley Vestrum.

With each merger, the greatest challenge was helping newcomers understand Stearns’ lending standards and risk tolerance, since many of the acquired banks suffered from loan issues. Senior management spent time at each new location working side by side with different departments to communicate expectations. They remain heavily involved in day-to-day operations. This centralization is often a big cultural change for people used to running their own show.

“At first, there was trepidation,” Vestrum says. “Ultimately, they realized that senior management involvement was not intended to be intimidating or looking over their shoulder. They are working together for the common good.”

Stearns made it clear from the beginning that it didn’t think acquired employees were failures just because their old bank was in trouble. It sought out leaders who bought into Stearns’ culture early on.

Getting on the same page with compliance was a focal point for Stearns. Failed banks often have adversarial relationships with their primary regulators, making it necessary for Stearns Bank to communicate its belief that regulators should be viewed as partners and resources. It did find that many of the acquired banks had strong compliance departments and staff, creating an opportunity to boost morale by giving enhanced responsibilities to these individuals, especially in the area of Bank Secrecy Act compliance, Vestrum notes.

New employees also had to learn to embrace thriftiness. This task was made easier by Stearns’ employee stock ownership program, which helps employees understand that spending the bank’s money is like spending their own.

In all, Vestrum says it takes one to two years to fully merge cultures, with the first couple of months dedicated to just getting to know each other. “The number-one key is communicating with the staff frequently, clearly and concisely to get across what the expectations are and defining what the culture is,” Vestrum says. “It shows that we care, that we’re working together—and it allows them the opportunity to be positive about their roles in the future.”

Kelly Pike is a writer in Virginia.