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Q2 Holdings hopes to woo bigger banks with PrecisionLender deal

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Q2 Holdings hopes to woo bigger banks with PrecisionLender deal

Q2 Holdings Inc., a key technology partner for many community banks' lending offices, will increase its focus on global enterprise banks following its largest-ever acquisition.

Austin, Texas-based Q2 provides digital solutions primarily to community banks, credit unions, and regional and midtier banks and has not traditionally focused on global enterprise banks. But it agreed to acquire Lender Performance Group LLC, which does business as PrecisionLender, for $510 million in cash. PrecisionLender works mostly with regional and midtier banks and global enterprise banks like Bank of America Corp. and TD Bank NA.

The two companies have had a partnership in the past, and Q2 President and CEO Matthew Flake called the shift to a merger "a no-brainer" for both companies on a call to discuss the merger.

PrecisionLender is a software-as-a-service provider of sales, pricing and portfolio management solutions to financial institutions and has about 150 bank customers. More than a dozen of those customers overlap with Q2, executives said, providing significant cross-selling opportunities.

PrecisionLender is a private company, and revenue estimates of the merger have not been made public. However, Q2 CFO Jennifer Harris expects the deal will be accretive to revenue growth in 2020.

"Given their solution is a pure cloud-based, multi-tenant solution, it does have a higher gross margin profile than Q2's digital banking platform," Harris said. "Therefore, as it grows to contribute a larger portion of our overall total revenue, it will provide opportunities for margin expansion."

Q2 expects to record one-time integration costs of $6 million to $8 million over the next two years, and an acquisition-related cost of $5 million, Harris said. PrecisionLender adds roughly 150 employees and $2 billion to Q2's total addressable market, Flake said. About 13,000 commercial bankers and operators used its solution as of the second quarter, and the platform currently helps banks to price more than $1.7 trillion in loans annually, he added.

The deal is three times larger than any that Q2 has done previously, according to one analyst. In response to a question about future M&A, Flake said the company will be "100% focused" on integrating PrecisionLender once the deal closes, which is expected in the fourth quarter.