MReport May 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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28 | TH E M R EP O RT FEATURE For Sale By Owner As the mortgage industry moves towards a more competitive environment, mergers and acquisitions can be an opportunity for long-term success if executed strategically. By Terry Schmidt D o buyers exist for this fictional lender? Industry news coverage the past few months would suggest not. Some banks are shutting down or selling their mort- gage operations. Refinance shops that boomed when rates were low have disappeared, scaled back, or are trying to reinvent themselves as purchase lenders. Interest rates and home prices are limiting the options for first-time homebuy- ers, making homeownership less affordable. Margins continue to shrink as lenders scramble to maintain market share. As the experts have been predicting over the last few years, our industry will go through ex- tensive consolidation in 2019 and 2020. Shakeouts in the financial sectors are not new. Stronger companies that have the financial resources typi- cally welcome this environment and can afford to make strategic merger and acquisition (M&A) decisions that will strengthen the firm for the longer term. As with any industry consolidation and a competitive marketplace, there are many high-quality independent mortgage banks that are trying to cope with declining origina- tions, extreme competition, and lower margins. These firms are now considering their options: Remain independent; liquidate their balance sheet and retire; or sell and partner with a larger firm. If they choose the M&A route, they are looking for acquirers that have a larger balance sheet and/or deep-pocketed share- holders, a compatible sales culture, upgraded technology offerings, and an entrepreneurial mindset. Ideally, the deal would result in a new combination where both sides win. What are the keys to success to mergers and acquisitions in the mortgage industry? More than a decade ago, the Guild leadership team developed a long-term strategic plan to expand nationally, by acquiring smaller, profitable, and overall successful firms that compete well in their local markets. We estab- lished initial criteria for evaluating our future partners by focusing on historical financial performance but quickly learned that the current market environment is a much better predictor of future performance. We like to see a consistency of performance over varied market cycles. It is relatively easy to make profits when times are robust; however, many firms have figured out how to generate profits when the markets are competitive and much more challenging. Firms that are looking to acquire other companies in the current environment should engage investment bankers that know their story, are familiar with their culture, and are willing to take the time to proactively uncover opportunities where the potential candidate has not yet figured out that he or she is a seller yet. Acquirers should look at all opportuni- ties, including where investment bankers are conducting competitive, "limited" auctions, while preferring opportunities that give them more time to get to know their future partners and that are not as widely marketed to the mortgage banking community. Keys to Success H ere are five areas companies should make a priority to ensure an acquisition is suc- cessful: cultural fit; leadership; geographic and market opportunity; retail channel dominance; and entrepreneurial spirit. Cultural Fit: From both the buyer and seller perspectives, culture is a No. 1 priority. Your business is based on people—how they work together and treat each other, what are their motivations, what is the tenure of senior management and loan officers, and just how strong is their company culture. If the people and values don't mesh, there is likely very little chance for success. Many companies believe in collaborative work environments where loan officers and employees work together and are motivated to find the right mortgage solutions for their bor- rowers. As a result, they look for acquisition candidates that think and act the way they do: executives that embrace active listening, are open to constructive learning and willing to adopt best practices. It is never "our way or the highway." Patience is a virtue; like most marriages, acquirers must be willing to devote the time and effort to a long-term courting phase to help ensure a successful partnership. Some transac- tions can take almost three years to reach that critical level of trust, comfort, and respect. Leadership: Value strong management teams that have developed a loyal, productive sales Due to rapidly changing market dynamics, a mid-size mortgage company with a core group of producers and a long history of growth and profitability in the region, seeking acquisition by a stronger firm with compatible cultures. Can be a growth opportunity for acquiring partner with strong and stable leadership, sufficient capital to operate in turbulent times, proprietary technology, low-cost loan production, extensive compliance operation, advanced sales tools/systems, and marketing savvy. FOR ACQUISITION

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