Community Development Financial Institutions (CDFIs) used various tactics to weather the COVID-19 pandemic, such as redistributing their loan mix and participating in government programs, including the Paycheck Protection Program. But this relative success hasn’t set leaders’ minds at ease.
The Federal Reserve Bank of Richmond’s COVID-19 CDFI survey found that roughly 82% of CDFI leaders were concerned about their institution’s ability to survive the pandemic due to lack of operational support, access to capital and loan loss reserves.
To help gain operational efficiencies and attract more low-cost capital investments, some CDFIs are looking for mergers and acquisitions (M&A) opportunities. But merging two organizations is no easy task, especially for CDFIs.
Combining two CDFIs is a complex process, especially from a banking and treasury perspective. CDFIs may face distinct challenges in this area, such as:
Despite these hurdles, diligence in early information gathering and planning can help CDFIs unlock value and cost synergies.
To start the process, create a current state inventory for both organizations. This should include:
Make sure to align the current states to your integration goal, which includes Day One control, visibility and long-term optimization projects. Then, document existing treasury structures, services and processes, including banking relationships, accounts and technologies.
Be sure to keep in mind the unique considerations that CDFIs have during M&As. For example, CDFIs usually have relationships with multiple banking institutions. Although these relationships maximize access to capital, they can cause inefficiencies in daily operations. Separate banking accounts often come with the stipulation that funds can’t be comingled, forcing CDFIs into stand-alone account structures that must be managed manually. The lack of automation makes it even more important to take a detailed approach to gathering information for both organizations.
Once you have an understanding of the current financial ecosystems of both organizations, you can take these next steps:
Implementing your plan is easier said than done. Too often, treasury teams are left out of planning and must resolve issues after the deal is complete. To avoid these pitfalls, make sure treasury leaders are at the table early on, along with trusted third parties and bankers who have expertise integrating treasury operations for community development organizations.
JPMorgan Chase’s Corporate Treasury Consulting team can help your community development financial institution organization consolidate and integrate treasury operations to support M&A efforts. Fill out the form below to get started.