WAR – ECONOMY – WHAT’S NEXT?

Over the past several weeks, the United States has been embroiled in a military conflict with Iran in the Middle East, and as of this writing, there is a cease fire and, hopefully, there will be discussions with regard to a deal that can be arranged between Iran, the United States and the rest of the world.  One of the problems in today’s world is that there are too many opinions, and non-stop commentary about the pros and cons, and of course the real issue is, who to believe?

While gas prices have increased, the economy seems relatively stable, and during the month of March there was good news with regard job growth, but the good news gets lost in whether the Strait of Hormuz can open on a consistent basis.  We suspect oil prices will come down, and inflation will return to a relatively normal level in the 2.5% - 3.0% range which is consistent with CPI.

We recently noted that the Federal Reserve Board of Governors may be considering a rate cut at its next meeting, based upon available information.  That would be interesting since just a few weeks ago, everybody anticipated there would be a rate increase or, at best, no changes for the rest of 2026.   So again, who the hell knows what’s going on … and with those supposed experts, who everyone seems to listen to, are often wrong. 

I noted with interest while, following the NCAA Women’s Basketball Championship, that ESPN had four of their prominent analysts pick the semi-final games as well as the championship game. With South Carolina’s victory over UConn and the victory of UCLA against Texas in the semi-final games followed by UCLA’s victory over South Carolina in the final - these experts were 0-12.  Maybe we spend too much time listening to experts who really don’t know anything more than you and I.  It’s always a guess.  But it will be interesting to see what happens over the next couple of weeks and if we stop pushing ourselves into a frenzy, often, things will work out.

WHEN MERGING MAKES SENSE

A recent article in the BID Daily Newsletter for April 6, 2026, discusses the concept of “When Merging Makes Sense” and has several thoughts that we have discussed with bankers and directors for over 40 years.  At this year’s California Community Banking Network Directors Roundtable on June 10, 2026, in Ojai, California, there will be a panel on what happens after the merger is completed – the importance of assimilation.  As we have long stated, you evaluate how successful a merger is not upon signing of the agreement or closing but one year after.  Did you get what you bargained for?  Most often not!  We encourage attendance and will have some additional things to say about the conference later in this issue of Reflections.

For community financial institutions (CFIs) weighing M&A in 2026 and beyond, the current environment is as favorable as it has ever been. However, favorable conditions alone don't make a merger successful. Here are the key questions to ask if you’re considering a merger or a sale.

Question 1: Why a Merger?

The most common mistake in banking M&A is pursuing a deal without a strategic rationale. Scale alone is not a strategy. Institutions that consistently extract value from mergers enter with a clear thesis, such as a specific geography they want, a talent gap they're trying to fill, a tech capability they need, or a deposit base that complements their own.

According to analysis from Reed Smith, the most active M&A catalysts in 2025 and 2026 include scaling for digital transformation and AI, accessing broader customer data, and geographic footprint expansion. Kansas City Fed data support the geographic factor: in over 50% of completed bank mergers, the acquirer expanded into new operating markets via the purchase.

Before engaging an advisor or approaching a target, articulate your strategic rationale in a single paragraph. What does this deal give you that organic growth cannot provide quickly enough? If the answer is vague, that's a signal to slow down and sharpen the thesis first.

Question 2: Does the Culture Fit Make Sense?

The financial due diligence behind a CFI merger is rigorous: loan book quality, CRE concentrations, deposit composition, interest rate risk, capital adequacy, and tech compatibility all require careful review. Yet, integration failures (e.g., a deal that closed successfully but quietly underperformed) always trace back to cultural issues rather than balance sheet problems.

For CFIs, culture is not a soft concept. It includes how lending decisions get made, how staff are managed, how exceptions are handled, how the institution relates to its community, and whether leadership styles are compatible. A merger between two institutions with fundamentally different credit cultures can create more risk than either institution would carry independently.

Staff attrition during regulatory review and integration periods is a documented cost — one that Fed Vice Chair Bowman noted as a consequence of delayed approvals that "run two institutions in parallel" for long periods.

Build cultural assessment into early-stage diligence, not as an afterthought. This means structured conversations with target leadership about decision-making, staff retention, community involvement, and credit philosophy before a term sheet is signed. Where big cultural gaps exist, factor in integration costs and timelines into your deal model.

Question 3: Do We Have a Full Picture of the New Regulatory Environment?

The recent shift in the banking regulatory climate is well-documented. The 2024 merger review guidelines that added friction to the approval process have been rescinded. The FDIC also withdrew its more stringent M&A policy statement. Since then, the OCC and Fed have been processing applications faster. As noted above, recent deals have cleared in half the time similar transactions required under the prior administration.

Yet, streamlined does not mean rubber-stamped. The core statutory review factors remain: competitive effects, financial and managerial resources, future prospects of the combined institution, convenience and needs of the communities served, and compliance with BSA/AML requirements. Institutions with unresolved supervisory issues, weak CRA performance, or meaningful CRE concentrations will still face scrutiny.

As industry observers have noted, the current pro-merger regulatory stance may not last indefinitely. The political window is most favorable through 2026–2027, before election dynamics reintroduce uncertainty. CFIs that have been considering a deal have reason to act quickly and with intention.

Engage regulatory counsel early, ideally before approaching a target, to understand your institution's standing with your primary federal regulator. A less-than-satisfactory exam rating or an open Matter Requiring Attention (MRA) can complicate or delay approval even in a favorable environment. Knowing your regulatory posture in advance allows you to address issues proactively rather than mid-process.

Question 4: Could We Build This Ourselves?

The conventional wisdom in banking M&A has often been to pursue scale. However, Kansas City Fed data tells a different story. Bank sellers in 2025 had median annual loan growth of 0.5% and core deposit growth of 0.4%, compared with 4.7% and 3.8% for acquirers.

The gap in profitability was equally striking, with sellers averaging just 0.6% ROAA, compared to 1.2% for buyers. In many cases, the most valuable thing a smaller institution offers isn't size; it's a niche commercial portfolio, a strong SBA lending practice, digital infrastructure that would take years to build organically, or a geographic presence in a key underserved market.

The banking tech stack is more important than ever. As Reed Smith noted, banks are actively pursuing acquisitions to accelerate digital transformation and build out AI capabilities, spreading tech investment costs across a larger base while accessing broader customer data.

For a CFI weighing a smaller target, the question worth asking is what it would cost us to build this ourselves and how long it would take? A smaller target with a strong book and low CRE concentration may be a better risk-adjusted value than a bigger bank with overlapping geography and a weaker deposit franchise.

Question 5: Are We M&A Ready Right Now?

Whether a CFI is actively pursuing a deal or simply keeping its options open, M&A readiness is worth investing in. Institutions with clean data, documented procedures, strong governance, and up-to-date compliance move through due diligence faster, are more credible to potential partners, and close on better terms.

Meanwhile, banks that scramble to organize financials, resolve open audit findings, or document core processes mid-diligence signal operational risk, which acquirers also price into their offers. M&A readiness that makes a CFI an attractive acquirer, also makes it a more attractive acquisition target, which matters for boards.

Either way, the M&A groundwork is the same on either side of the table: clean data, strong governance, well-documented processes, and a clear picture of the institution's financial position and risk profile.

Conduct an internal M&A readiness assessment even if no deal is imminent. Are your call report data and financial records audit-ready? Do you have documented credit policies, underwriting standards, and risk management procedures? Are there any open supervisory matters that need to be resolved? Institutions that invest in readiness now are better positioned to act quickly.

Are We Ready to Act with Clarity?

The Riegle-Neal era of the 1990s is instructive because it shows us what happens when a regulatory window opens, and institutions aren’t prepared to act. The mergers and acquisitions that thrived were not necessarily the ones that moved fastest, either. They were the ones who moved with clarity about what they wanted, disciplined in how they evaluated it, and rigor in their integration. 

The current environment creates a genuine opportunity for CFIs to expand, acquire capabilities, find a stronger partner, or simply review their options. That begins with an honest internal assessment of strategy, readiness, and whether a merger is actually the right path forward. For some institutions, the answer will be yes. For others, the most valuable outcome may simply be greater clarity about what real, lasting growth requires.

We encourage bankers and directors to subscribe to the PCBB BID Daily Newsletter.  A quick easy read on interesting topics.

A BUSY WEEK

The federal regulators had a busy week that started on April 7, 2026, when they issued the final rule to Prohibit Use of Reputation Risk by Regulators, requested comments on the Anti-Money Laundering/Countering the Financing of Terrorism Proposed Rule and also the approval of the implementation of the GENIUS Act Requirements and Standards. 

On the Prohibit Use of Reputation Risk by Regulators, the OCC and FDIC issued a final rule that codifies the elimination of reputation risk from their supervisory programs.  The rule defines reputation risk and prohibits the agencies from criticizing or taking adverse action against an institution on the basis of reputation risk.  Good news!  The rule also prohibits the agencies from requiring, instructing or encouraging an institution to close customer accounts or take other actions based on a person or entity’s political, social, cultural or religious views or beliefs, constitutionally protected speech or solely on the basis of politically disfavored but lawful business activities perceived to present reputation risk.

The Anti-Money Laundering / Countering the Financing of Terrorism proposed rule, focuses on amending the respective requirements for supervised institutions to establish and maintain effective risk-based anti-money laundering and countering the financing of terrorism (“AML/CFT”) programs designed to identify, assess and mitigate risk of illicit finance.

The proposed rule would:

• Incorporate the AML Act provision that a bank’s AML/CFT program should be risk-based, including ensuring that banks direct more attention and resources toward higher-risk customers and activities consistent with the risk profile of the institution, rather than toward lower-risk customers and activities. 

• Describe the requirements for a bank to establish an AML/CFT program, explicitly incorporate FinCEN’s existing customer due diligence requirement, and clarify that a bank’s designated AML/CFT officer must be located in the United States and accessible to regulators.

• Require that once a bank has properly established its AML/CFT program, the institution maintains that program in all material respects.  In addition, the proposed rule would clarify that only significant or systemic failures to implement a properly established program would warrant an “AML/CFT enforcement action” or a “significant AML/CFT supervisory action.”

• Enhance FinCEN’s role in the agencies’ supervision and enforcement process by establishing a new consultation framework for certain actions by the agencies.

• Clarify that banks may share any information with FinCEN related to certain AML/CFT supervisory and enforcement actions.

On the GENIUS Act requirements and standards, the FDIC approved a notice of proposed rulemaking that would implement certain requirements and standards under the Guiding and Establishing National Innovation of U.S. Stablecoins Act (“GENIUS Act”) and would also establish a prudential framework for FDIC-supervised permitted payment stablecoins issuers, including requirements related to reserve assets, redemption, capital and risk management standards.  The proposed rule would establish requirements for FDIC-supervised permitted payment stablecoin issuers and insured depository institutions that provide certain payment stablecoin related custodial and safekeeping services.  There are additional requirements that are set forth in the proposed rule; however, this was a busy couple of days for the regulatory agencies, but also good movement.

CCBN DIRECTORS ROUNDTABLE

The 2026 California Community Banking Network Directors Roundtable will be held at the Ojai Valley Inn on June 9^th and 10^th, 2026, with the program taking place on June 10, 2026.  Below is a link to the program which we believe is an excellent program available for directors and executive management:

2026 Directors Roundtable - California Community Banking Network

These programs are always valuable for directors and CCBN does an excellent job in providing education and networking directors of community financial institutions in the Western United States.  

BRAVING IN A TIME OF CONSTANT CHANGE

Over the past few months, in the Reflections we have focused on character and leadership.  This month, again, we focus on the concept of Braving in a Time of Constant Change, an article we wrote a few years ago based on a book by Brene Brown titled “Braving the Wilderness:  The Quest for True Belonging and the Courage to Stand Alone. We Need Courage – We Need to Be Brave – We Ned to Lead!  The article is attached.

WHAT IS OUR MISSION?

A recent Daily Stoic asked the question: what is our mission?  Here are some great thoughts from the Daily Stoic and Marcus Aurelius in Meditations.

Our mission is dealing with obstacles. Our mission is being a good person no matter what happens. Our mission is excellence, always. What this means is that we’ve been given a gift. Fate is offering us fuel. It’s not hindering us in the least, because our mission is bigger than this thing in front of us. Our mission is, by definition, flexible and adaptable … and also unchanging.

That mission might be raising your kids with character. It might be serving your community with integrity. It might be building something - a company, a non-profit, a body of work - the right way. Maybe it’s rebuilding after a setback, telling the truth when it’s inconvenient, or simply refusing to let bitterness take root in your heart.

Roles shift. Titles change. But the mission never does.

Our mission is to show up. Our mission is to be good. Our mission is to be excellent. So, while circumstances can change what that looks like, nothing and no one can get in the way of it.

Something to think about and, also, something to create conversations about “what your bank’s mission is?”